3M Stock Remains an Attractive Defensive Play

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Editor’s note: “3M Stock Remains an Attractive Defensive Play” was previously published in March 20. It is regularly updated to include the most relevant information.

3M Stock Remains an Attractive Defensive Play

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With its shares rebounding more than 30% from their 52-week lows, is 3M (NYSE:MMM) stock a buy? March’s market maelstrom made blue-chip names like this industrial conglomerate worth buying.

A true “dividend aristocrat,” the stock now sports a healthy 3.9% yield. But that’s not all! Since the stock’s valuation is reasonable, it gives investors a chance to own a high-quality stock at a fair price.

The question is whether the recent market rebound can continue. Economic aftershocks from the novel coronavirus pandemic may give investors good reason to “sell in May and go away.” But, though markets may drop further,  3M is a defensive stock, so it could provide investors with a good opportunity.

Let’s dive in and see why MMM stock could be a buy at today’s prices.

Why Consider MMM Stock Today?

Today’s enviornment is not the best of times for industrial conglomerates like 3M. Nevertheless, the company posted strong results when it announced earnings on April 28. This may not be a surprise, given increased demand for the company’s respiratory masks in the wake of coronavirus. Yet, this tailwind only resulted in $100 million of additional quarterly revenue.

Overall, lowered industrial demand mean bad news going forward for the company. As a result, they have withdrawn guidance, and plan on making big cost reductions as they ride out the downturn.

Even before the outbreak, things were not so hot for 3M.

Between 2018 and 2019, its sales dipped from $32.8 billion to $32.1 billion. In the same time frame, its net income dropped from $5.4 billion to $4.6 billion. Clearly, the company needs to get back on the growth train. But, given the current enviornment, don’t expect this to happen anytime soon.

Upbeat catalysts may be a stretch, but how about the stock’s valuation? 3M’s shares look reasonably priced, with a forward price-earnings (P/E) ratio of 18.9. Granted, its peers, including Honeywell (NYSE:HON), sell at similar valuations (Honeywell has a forward P/E ratio of 19.4). Other industrial conglomerates, like General Electric (NYSE:GE) also trade at similar multiples (GE has a forward P/E ratio of 20.4).

So, with minimal catalysts and a fair, but not a low, valuation, why should investors buy MMM stock today? Simply put, they could take advantage of a likely future flight-to-safety trend . InvestorPlace’s Josh Enomoto recently included the company as one of the best recession proof stocks to buy in today’s enviornment. As he put it, these kinds of stocks are “your best bet for beating the coronavirus.”

Add in the stock’s strong dividend (see below), and the shares offer investors a lot.

Buy for the Dividend, Stay for the Rebound?

The key positive trait of MMM stock is its dividend. It’s increased its dividend 61 years in a row. With its high yield, the stock is one of the best blue-chip dividend plays out there.

Yet 3M’s payout ratio is a concern. The company now pays out 73% of its earnings in the form of dividends. Since its earnings may dip this year, it’s possible that the company will tighten its belt. I don’t think 3M, which has increased its annual payout by an average of 11% over the last five years, will reduce or cut its dividend. The company, however, may increase its payout more modestly than 11%.

Nevertheless, 3M’s dividend may be one of the safer ones out there. With blue chips like Exxon Mobil (NYSE:XOM) freezing their dividend, income investors should consider stronger opportunities than that venerable oil company.

3M stock could also be a “buy for the dividend, stay for the rebound” opportunity. I’m not the only one who thinks the stock could rally tremendously. Melius Research’s Scott Davis upgraded 3M’s shares last month from “hold” to “buy,” giving the stock a $205 per share price target.

While $205 per share seems rich compared to the stock’s  current prices, Davis believes the company’s businesses, which were already in a down cycle, are about to improve. But analysts concede that the company still faces several risks, besides China’s slow recovery. For one, the company’s potential liabilities from its past use of PFAS (polyfluoroalkyl) substances could hurt it. Gordon Haskett’s John Inch believes 3M’s total PFAS liability could top $15 billion. Yet all of these negative factors could already be priced into the shares, considering their poor performance in 2019, even as the S&P 500 made new highs.

3M Is a Long-Term Buy at Today’s Prices

Weighing opportunities against risk, 3M at first glance doesn’t look like a strong buy. Despite respirator masks flying off shelves, 3M’s potential revenue from them isn’t exactly a needle-mover. Factoring in recent risks like coronavirus, along with past issues such as weak sales growth and PFAS liabilities, investors should be cautious.

Yet much of these issues could already be priced into the shares. Investors can buy beaten-down 3M stock now, and start collecting an above-average dividend yield. As markets rebound, the stock could head towards its prior level of around $175 per share.

In short, consider MMM stock a safe harbor with the potential to move higher as markets recover. At today’s prices, its shares may now be a good opportunity for shrewd investors.

Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not maintain a position in any of the aforementioned securities.

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