Source: PaxForex Premium Analytics Portal, Fundamental Insight
In its recent first-quarter earnings announcement, 3M disclosed its intention to reduce its dividend - a move that may initially disappoint income-focused investors but ultimately bodes well for the company's future prospects. This strategic decision aims to support 3M's development trajectory and alleviate uncertainties surrounding its stock.
Moreover, amidst this announcement, several positive aspects emerged in the earnings report, enhancing the appeal of the stock for potential investors. Here's a breakdown of the key points to consider:
While management has not specified the exact dividend amount, Executive Chairman Mike Roman indicated during the earnings call that it would be approximately 40% of adjusted free cash flow and is slated to be declared in May. Based on earnings guidance for 2024, which excludes the recently spun-off healthcare business, Solventum, and assuming a free cash flow (FCF) per share of $7.05, the projected dividend per share for 2024 stands at $2.82. This equates to a dividend yield of 2.85% at the current stock price.
The rationale behind 3M's decision to reduce the dividend aligns with previous discussions on the matter. The company faces significant financial commitments stemming from legal settlements, including $12.5 billion for PFAS products over 13 years and $6 billion for combat arms earplugs spanning from 2023 to 2029. Additionally, the absence of steady cash flow from Solventum will exert pressure on the FCF landscape precisely at a time when 3M needs to channel resources into business expansion efforts.
Now, let's shift our focus to the positive aspects of this development. The decision to reduce the dividend will unlock valuable cash resources that can be strategically invested to fuel 3M's growth initiatives. With management now poised to address the company's subdued growth trajectory, there are reasons for optimism on several fronts.
Firstly, over the past decade, 3M's healthcare and consumer segments have been among its least-performing divisions. With healthcare now spun off as Solventum, and a commitment from 3M's management to trim down 5% of its consumer portfolio, significant improvements are anticipated. Earlier this year, Roman conveyed to investors the company's intent to divest from segments exhibiting limited market growth and subpar performance - a strategy reminiscent of the successful portfolio pruning undertaken by Illinois Tool Works in recent years.
Secondly, 3M has faced criticism for its underwhelming margin performance in the past decade. However, following a comprehensive restructuring plan launched last year, which involved measures such as workforce reduction, supply chain streamlining, and corporate structure simplification, positive margin trends are emerging. Notably, the company's adjusted operating margin (excluding Solventum) is projected to rise from approximately 18.7% in 2023 to a range of 20.7% to 21.45% in 2024.
Thirdly, despite weaknesses in the consumer segment due to high interest rates impacting spending on home-related products, there are indications of growth resurgence in areas such as safety and industrial, transportation, and electronics businesses. Management anticipates adjusted organic sales growth of 0% to 2% in 2024, signaling an upward trend.
Moreover, 3M is demonstrating resilience in outperforming its end markets in the electronics and automotive sectors. Although the first-quarter performance in transportation and electronics was somewhat influenced by pre-production purchasing by customers, indicative of production ramp-up and new product introductions, it reflects an improving business environment.
In summary, 3M's strides in both growth and margin performance suggest a positive trajectory. With greater clarity on legal settlement issues and the dividend reduction decision now behind, investors may find reassurance in considering a stock trading at 14 times its estimated 2024 earnings.
As long as the price is above 90.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 96.55
- Take Profit 1: 100.00
- Take Profit 2: 104.00
Alternative scenario:
If the level of 90.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 90.00
- Take Profit 1: 86.00
- Take Profit 2: 80.00