{"id":8466,"date":"2023-11-02T04:55:20","date_gmt":"2023-11-02T04:55:20","guid":{"rendered":"https:\/\/infundpros.com\/news\/3m-a-steal-with-a-7-yield-nysemmm\/"},"modified":"2023-11-02T04:55:22","modified_gmt":"2023-11-02T04:55:22","slug":"3m-a-steal-with-a-7-yield-nysemmm","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=8466","title":{"rendered":"3M: A Steal With A 7% Yield (NYSE:MMM)"},"content":{"rendered":"
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<\/picture>
<\/figcaption><\/figure>\n<\/p>\n

Industrial conglomerate 3M Company (NYSE:MMM<\/span>)<\/strong> is a potentially attractive cyclical bet on profit growth after it was reported that the U.S. economy advanced at a 4.9% annualized rate in the last quarter.<\/p>\n

3M recently reported earnings and the most compelling factor of an investment in the conglomerate is that its earnings sell for a 9x multiple, plus the stock pays investors a very healthy 7% yield.<\/span><\/p>\n

3M\u2019s cash flow improved in the last quarter and the conglomerate raised its adjusted profit forecast too. In my view, the low P\/E ratio of 9x incorporates a huge margin of safety, and the dividend is solidly covered by expected adjusted earnings for 2023.<\/p>\n

With the stock being as cheap as it is and economic tailwinds being favorable, 3M makes a compelling value proposition for passive income investors.<\/p>\n

Business Composition And Healthcare <\/strong>Spinoff<\/span> <\/h2>\n

3M is a diversified conglomerate with a number of business interests that include Health Care (to be spun off next year), Safety & Industrial, Transportation & Electronics and Consumer. The portfolio of industrial businesses produced $8.3 billion in net sales in the third quarter and $1.9 billion in adjusted free cash flow.<\/p>\n

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\"Net <\/picture>
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Net Sales (3M Co.)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

The company took a $4.2 billion pre-tax impairment charge in the third quarter. The impairment was related to a settlement over combat arms earplugs (which is discussed further below).<\/p>\n

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\"Combat <\/picture>
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Combat Arms Earplug Settlement (3M Financial Earnings Release)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Just like General Electric, 3M has decided to spin off its health care business. Spinoffs have the potential to re-rate to a higher valuation multiple post-spinoff if the entity is run independently and investors gain a clearer understanding of the spinoff\u2019s stand-alone operations.<\/p>\n

The health care business spin-off is expected in the first half of 2024. GE Vernova, General Electric\u2019s energy business spinoff is also expected to come to the public markets next year.<\/p>\n

Combat Arms Resolution Is Removing A Valuation Headwind<\/strong><\/h2>\n

3M has been involved in litigation about defective combat arms earplugs that were manufactured by Aearo Technologies and 3M. Ongoing litigation has been a headwind to 3M\u2019s valuation in the last year, but a major milestone was reached in August when the conglomerate agreed to resolve such litigation claims and settled for a total contribution of $6 billion ($5 billion in cash + $1 million in common stock). 3M took a considerable impairment charge in the third quarter, to the tune of $4.2 billion, or $5.80 per share.<\/p>\n

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\"Combat<\/span>
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Combat Arms Claims Settlement (3M Co.)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

<\/h2>\n

Balance Sheet Discussion<\/strong><\/h2>\n

3M\u2019s balance sheet reflected a strong cash position, with $5.14 billion in cash presently sitting in the conglomerate\u2019s accounts. Compared to the end of 2022, 3M\u2019s cash and cash equivalents have increased by $1.49 billion and its free cash flow should further swell this cash balance in the fourth quarter.<\/p>\n

In terms of financial obligations, 3M has a bit of debt (and thus leverage): Long-term debt, as of the end of 3Q-23, was $12.88 billion, but nonetheless, reflected a decline of $1.13 billion in the last nine months. A high amount of debt could potentially become a challenge for the conglomerate during a recession as industrial profits tend to decline during economic downswings.<\/p>\n

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\"Balance <\/picture>
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Balance Sheet (3M Co.)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

3M Raised Its Profit Forecast For 2023<\/strong><\/h2>\n

Despite the settlement, 3M\u2019s management is optimistic about the underlying momentum in its industrial operations which led the conglomerate to lift its adjusted profit forecast for 2023 from $8.60 to $9.10 per share to $8.95 to $9.15 per share, reflecting a raise of 4.1% at the lower end of the profit guidance.<\/p>\n

3M Ultimate Advantage: Pay A 9x P\/E, Get A 7% Yield<\/strong><\/h2>\n

The most appealing aspect of an investment in industrial conglomerate 3M is the company\u2019s low valuation multiple based on earnings.<\/p>\n

Right now, investors only pay nine times leading earnings for an investment in 3M that yields 7%. 3M pays a $1.50 per share per quarter dividend which implies a total annual dividend pay-out of $6.00 per share.<\/p>\n

With a profit forecast of $8.95 to $9.15 per share, 3M is on track to pay out 66% of its adjusted earnings this year. 3M has paid a dividend for more than a century and raised its dividend consistently in the last 64 years.<\/p>\n

Based on 3M\u2019s profit expectations, sourced from Nasdaq, the market models a 2024 profit figure of $9.82 per share, on average, reflecting about 8% YoY profit growth. For the following year, the market models 7% profit growth per share.<\/p>\n

3M is particularly a steal when its low P\/E valuation of 9x is compared against General Electric which is selling for a leading P\/E ratio of 23.5x. 3M\u2019s litigation as well as impairment charge for the third quarter have been a headwind for the conglomerate\u2019s valuation as of late.<\/p>\n

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\"Yearly <\/picture>
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Yearly Earnings Forecast (Nasdaq)<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Why 3M Might Trade At A Higher\/Lower Earnings Multiple<\/strong><\/h2>\n

3M is a cyclical industrial conglomerate that profits from robust economic growth. The U.S. economy grew at a 4.9% annualized rate in the third quarter, so the macro backdrop is still quite favorable for 3M. Slower-than-expected profit growth during an economic contraction would probably be a headwind for the industrial conglomerate.<\/p>\n

Since 3M recently resolved its main litigation issue, I think that 3M has a much better risk\/reward relationship than it had at the start of the year.<\/p>\n

My Conclusion<\/strong><\/h2>\n

3M could profit from economic tailwinds which would support its cyclically-oriented industrial operations.<\/p>\n

The recent settlement over defective combat earplugs has removed a considerable headwind and could clear the way for a re-rating.<\/p>\n

3M\u2019s ultimate value proposition, in my view, is its low valuation that leads to a huge dividend yield which is covered by adjusted earnings. Passive income investors can collect a 7% yield here while paying only 9x leading earnings for 3M.<\/p>\n

The valuation multiple contains, thus, a high margin of safety, in my opinion, and with the U.S. economy remaining in solid shape in the third quarter, the case for a re-rating could easily be made.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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