3M Co. (MMM) has seen a significant drop in its stock value over the last six years, coinciding with a strong gain in the broader S&P 500 index. The company is currently facing legal challenges, with a $16 billion settlement to resolve two lawsuits. There is also the possibility of a dividend cut, which could result in 3M falling out of the Dividend Aristocrats list of stocks that have consistently raised dividends for 25 years or more.
Despite these challenges, some investors see potential in 3M as a contrarian investment opportunity. Howard Marks, a successful value investor, has emphasized the importance of making contrarian investment decisions that involve buying when others are selling. This approach can be uncomfortable but has the potential for significant profits in the long run.
3M’s main strength lies in its brand loyalty, offering a wide range of products under popular labels such as Scotch, Post-It, and Filtrete. The company’s profitability metric, free cash flow (FCF), has been healthy despite challenges during the pandemic. With more workers returning to offices, 3M’s FCF is expected to improve further.
Last year, 3M settled two major lawsuits, with the total bill amounting to $16 billion. While this may seem like a significant burden, the company’s FCF can handle the costs without compromising its financial stability. Investors often overemphasize legal issues, as seen in the case of AmeriSource Bergen, where concerns about a settlement related to the opioid crisis proved to be overstated.
The recent spinoff of 3M’s medical-devices business, now called Solventum, is expected to streamline the company and reduce its debt, leading to improved cash flow. Despite these positive developments, 3M’s stock is currently trading at a discount, with a dividend yield of 6.5%. While a dividend cut is a possibility, it may already be priced into the stock, making it a potential buying opportunity for investors.
Overall, 3M presents a unique investment case for contrarian investors looking for long-term growth potential. While there are challenges facing the company, including legal issues and a potential dividend cut, its strong brand loyalty and healthy free cash flow position it well for future success. By carefully considering the risks and opportunities, investors can make informed decisions about the timing of their investment in 3M and potentially see significant returns in the future.
