Is 3M Stock a Safe Bet?

3M Company (NYSE:MMM) started as a small-scale mining operation in Northern Minnesota way back in the early 1900s and was originally called the Minnesota Mining and Manufacturing Company. It has grown over the years and is now a world-class manufacturing company that produces building materials and adhesives, as well as household chemicals.

3M is a well-known name in the Fortune 500 list of companies and manufactures well over 60,000 products that are applied in homes, businesses, schools, hospitals, and several more sectors. Notably, new inventions in the last five years contributed to one-third of its total sales.

The stock is up 46% year-to-date so is it still worth buying? 

CEO William Brown Might Have a Way Forward

During the latest earnings call, CEO William Brown, who took over the position on May 1, identified the company’s weaknesses and indicated what direction he wants to see 3M head in over the next several years. Most importantly, ramping up 3M’s rate of new product introductions to revitalize a product lineup that the CEO admitted has become stale.

3M has been experiencing a lot of changes over the last few years, especially with the recent spin-off of the healthcare business that was part of a massive restructuring plan. It has also decided to cease PFAS production by the end of 2025. Plus, the company implemented several organizational changes, including shifting from a geographical to a global business unit organization and centralizing global supply chain activities.

Specifically, the CEO discussed the tender organic growth rates that have been below market standards and peers for several years. Moreover, investment in new product development has been reducing gradually, as evidenced by the declining revenues from new products launched during the past decade.

While the company was moving to emerging markets such as auto electrification, industrial automation, data centers & semis, and climate tech, Bill Brown indicated that this was not the best approach as “these efforts aren’t material enough today to offset erosion in our core.”

He is targeting three major areas to sustain top-line organic growth, improving operational performance across the enterprise, and effectively deploying capital.

He aims to increase the rate at which new products are developed, as well as the capacity of engineers, and optimize supply chains to improve sourcing effectiveness.

He also intends to simplify the organization, streamline manufacturing and logistics, improve supply chain management, minimize yield loss, and increase services with less inventory.

Investors’ optimism grew with the company revising its outlook. While 3M continues to see adjusted total sales growth of -0.25% to +1.75% and, on an organic basis, flat to +2%, 3M expects full-year adjusted EPS to be between $7.00 and $7.30, above its previous forecast of $6.80 to $7.30.

Sales Flat But Profits Start To Grow

For the most recent quarter, the company reported sales of $6.255 billion, a slight decline of 0.4% year over year, while organic sales declined 0.3%. Adjusted net sales totaled $6 billion, up 1.1% year over year. Adjusted organic sales rose 1.2% from the year-ago quarter.

Adjusted EPS was $1.93, up from $1.39 in the prior-year quarter, beating the consensus of $1.68. Adjusted operating margin expanded to 21.6% from 17.2% a year ago.

3M returned $786 million to shareholders via dividends and share repurchases. The company pays an annual dividend of $2.80 per share, which translates to a yield of 2.24% at the current share price. Its solid record of 65 consecutive years of dividend growth makes it popular among income-focused investors. 

The industrial titan has been able to maintain profitability with consistent price hikes in almost all product lines and these changes have largely neutralized the effect of overall inflation and a weaker consumer business.

Other changes that are likely to enhance 3M’s operations are restructuring activities aimed at cutting down on expenses, increasing effectiveness, and avoiding falling behind competitors.

Wolfe Research analyst Nigel Coe sees these changes as a promising beginning for 3M, indicating growth and innovations ahead.

Is 3M Stock a Safe Bet Now?

With a 53 year track record of paying dividends and a product line spanning 60,000 offerings, 3M is about as safe an industrial stock as exists.

The company has a lot of tailwinds at the moment with net profitability expected to rise this year alongside a high shareholder yield.

Sentiment has been growing ever more positive too with 5 analysts upgrading their consensus forecasts for the firm.

Looking at the firm through the lens of earnings multiples it appears cheap when future growth is factored in also.

With all that said, while 3M has been making a lot of efforts to address various challenges, these changes have created a shift in the organization and shifted the strategy map and priorities, which in turn have elevated uncertainties about its long-term trajectory.

Although the company’s CEO seems assured of the company’s prospects, whether these changes are enough to return 3M to a path of healthy growth anytime soon remains somewhat up in the air. For now, it’s clear that the market is buying into the vision and the share price is already pricing in good news in coming quarters.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.