A buying opportunity for fans of high yielding recovery stocks
21st June 2023 08:49
by Rodney Hobson from interactive investor
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Shares are down 20% in the past year at prices not seen since the end of 2012, but overseas investing expert Rodney Hobson thinks this could be a great stock for contrarian investors.
The performance at diversified multinational conglomerate 3M Co (NYSE:MMM) has been a disappointment since the pandemic eased. The shares could at last be on the turn, opening up a possible buying opportunity for those seeking recovery stocks.
While 3M had a good pandemic, with hand sanitisers and safety glasses in particular in great demand throughout most of 2021, it was already clear by the end of that year that life was becoming tougher. While the bubble did not actually burst, it did become somewhat deflated.
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Despite promises that 3M, which specialises in worker safety, healthcare and consumer goods, would concentrate on the parts of the business that offered most promise, sales have continued to slide. In the first quarter of 2023, the latest for which figures are available, sales fell 9% to $8 billion. Although that was partly due to disposals, organic sales were down 4.9% mainly because of a fall in sales of disposable respirators after the end of the pandemic. Covid-19 continues to cast a long shadow, as does 3M’s withdrawal from Russia after its invasion of Ukraine.
The company’s answer is aggressive reorganisation, which causes upheaval and cost cutting, and always costs money in the short term to fund redundancies. It announced a cut of 2,500 manufacturing jobs in January and has since followed up with a further 6,000 reduction. Combined, this should eventually save $700-900 million a year.
Shareholders can expect continuing tweaks to 3M’s portfolio, the latest being the sale for $70 million of a small Italy-based company making local anaesthetics, syringes and needles.
One imponderable is that a number of lawsuits hang over 3M, in the unrelated fields of chemicals and military ear plugs. Lawsuits in the US tend to be lengthy and expensive but there are indications that chemicals at least could soon reach a favourable conclusion. Expect an upward lurch in the share price if that happens.
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Optimism persists at 3M. A continued improvement in supply chains has emboldened it to reaffirm its expectations for the full year, with adjusted earnings per share coming in at $8.50-9.00, accompanied by strong positive cash flow.
The trajectory of the shares has followed the pattern of changing fortunes. They recovered well from a low of $125 during the pandemic-induced stock market crash in 2020 to a peak above $200 before the end of the following year, but a relentless slide since took them below $100.
Source: interactive investor. Past performance is not a guide to future performance.
They are now showing some early signs of recovery and are back to $102, where the price/earnings ratio is unchallenging at 10.8 and the yield is well above the norm for American stocks at 5.72%. It is worth noting that 3M has raised its dividend every year for 65 years and, while there could be a pause in that progressive policy, it is highly unlikely that there will be a reduction in the payout any time soon.
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Hobson’s choice: This company has been a major disappointment over the past 18 months. I first recommended the shares at $167 during the pandemic and was delighted to see them top $200 subsequently. Alas, in February last year, when the shares were back at $167, I made the mistake of arguing that the worst of the slide was over. It certainly was not.
However, at the risk of making the same mistake twice, I repeat the buy recommendation at a somewhat lower level. The decent yield is a continuing consolation even if, as is likely, the shares take a long time to return to former glories. The diversity of 3M’s products should see it through the short-term headwinds, and this could be a great stock for contrarian investors. If you are averse to risk, though, this is probably not one for you.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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