Source: PaxForex Premium Analytics Portal, Fundamental Insight
After the release of 3M's full-year 2023 earnings, its stock witnessed a significant decline of approximately 10%. The primary cause for concern stemmed from the company's outlook for 2024, which raised several red flags. However, the overarching issue at play here is the prevailing uncertainty.
For investors contemplating whether to buy, sell, or hold 3M, a comprehensive analysis reveals that conservative investors, particularly those who prioritize peace of mind, might consider selling the stock. There are various factors contributing to this recommendation.
Firstly, 3M is grappling with substantial legal and regulatory challenges that have incurred substantial financial losses. The projected total cost is expected to reach the billions before resolving all the issues. These challenges encompass product liability lawsuits related to earplugs sold to the US military, environmental concerns linked to facilities producing forever chemicals, and legal ramifications arising from the forever chemical situation.
A significant predicament for investors lies in the fact that 3M is limited in what it can disclose about these ongoing issues due to their legal and regulatory nature. While this confidentiality is logical given the circumstances, it leaves shareholders in the dark, creating an uneasy situation. Despite 3M's historical track record of rewarding investors with a growing dividend (earning it the title of a Dividend King), the current scenario raises stress levels associated with owning 3M.
Moreover, insights from the company's fourth-quarter earnings call indicate that 3M faces restricted options in covering the extensive legal and regulatory expenses it confronts. The senior vice president of investor relations explicitly mentioned, "Absent the proceeds from the intended spin-off of the healthcare business, the company has not concluded how it would fund amounts due under the public water supplier and Combat Arms earplugs legal settlements."
Essentially, 3M finds itself cornered by the costs it incurs, with limited viable options. The healthcare division, initially anticipated to be a growth driver for 3M, is now being considered for a spinoff – a move that might be necessitated by financial constraints. Selling off a segment viewed by many as the company's crown jewel, especially one contributing about 25% of revenue, suggests a potential need for a dividend reset following the spinoff.
Given the current climate of uncertainty, which amplifies the impact of negative developments, the market's harsh reaction, particularly in response to the company's relatively weak full-year 2024 outlook, appears justified. In essence, 3M is not presenting itself as a stock conducive to a restful night's sleep for investors.
To be fair, a significant degree of pessimism has already been factored into 3M's current stock price, with shares plummeting around 60% from their 2018 highs. Concurrently, the dividend yield has surged to near-all-time highs. For contrarian investors, these indicators suggest that 3M is currently trading at deeply discounted levels and could potentially be a candidate for a turnaround.
However, the success of such a turnaround hinges on effectively navigating the ongoing legal and regulatory challenges. Given the company's substantial size and robust financial standing (it holds an investment-grade rating), there's a reasonable expectation that 3M will manage to overcome these hurdles. While it might involve spinning off one of its more lucrative businesses, the core of 3M remains solid, with its industrial operations anticipated to grow at a slightly slower pace than healthcare.
The looming question revolves around the fate of the dividend, likely to undergo a reset with the proposed healthcare spinoff. If the healthcare business continues to pay a dividend, and 3M adjusts its own dividend to maintain the combined payout at pre-spinoff levels, there wouldn't technically be a dividend cut. This approach could potentially allow 3M to retain its coveted Dividend King status, which holds psychological significance for many investors. The allure of the lofty 6.2% dividend yield becomes particularly attractive when compared to the S&P 500 index's meager 1.4% yield.
However, both the arguments for buying and holding must grapple with the persistent information vacuum surrounding the legal and regulatory issues. Investors must have faith that these challenges will be resolved in a manner that doesn't substantially alter 3M's business prospects beyond the healthcare spinoff. Given the considerable uncertainties still in play, engaging with 3M either through buying or holding requires an optimistic outlook and a considerable amount of trust. This may limit its appeal to a relatively small subset of the investing community.
While 3M boasts a rich history, the current landscape is riddled with uncertainties, making it prudent for most investors, especially conservative income investors, to adopt a wait-and-watch approach. This stance holds particularly true for those not inclined towards aggressive investing or turnaround situations.
As long as the price is above 92.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 95.80
- Take Profit 1: 100.00
- Take Profit 2: 104.00
Alternative scenario:
If the level of 92.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 92.00
- Take Profit 1: 89.00
- Take Profit 2: 85.00
