As U.S. equities crash on Monday, no doubt some investors are looking to buy the dip. And at least a few of those investors will consider 3M (NYSE:MMM) stock.
After all, in a “flight to quality,” 3M stock would seem to be an attractive target. The company is one of the great U.S. industrial companies. with a dividend yield nearing 4%. Valuation on an earnings basis look reasonable, if not attractive.
To be fair, it’s possible that over time, 3M will prove to be a solid long-term investment. It’s been so in the past, as a “Dividend Aristocrat” with 62 consecutive years of dividend increases.
But as I was in August, I’m skeptical of even that long-term case, as I see significant risks ahead. Meanwhile from the short-term perspective, MMM stock does not look like a “buy the dip” candidate. Fears of the coronavirus from China pressuring global stocks are a problem for almost every stock in the market, but they pose particular risk to 3M stock.
The core case for 3M at the moment is that it’s a wonderful company simply going through short-term problems. Upheaval in China and the automotive business, in particular, pressured 2019 results.
But those issues will pass. Meanwhile, MMM stock historically has been a solid investment. Total returns over the past 25 years, according to YCharts, are just a hair shy of 1,000%. That’s almost exactly a 10% compound annual return — an excellent figure over such a long stretch.
There’s one core reason for caution, however: we’ve heard that case before, and not too long ago. Another U.S. industrial giant with a history of dividend increases was struggling, and many investors looked to capitalize on the dip. As one author wrote in 2017:
[This company] requires patience, plain and simple. Investors must be willing to give the industrial conglomerate the time it needs to get out of its funk…but if they do, [the] stock will pay off.
As another put it earlier that year:
The 16 analysts offering 12-month price forecasts…[suggest] an increase (ie, appreciation) of about 17% to 18%…Once its stock corrects after the earnings report backlash, taking its dividend into account, investors could gain more than 20% in terms of total returns.
Although it is impossible to predict how this year will work out for [the company], for those who recognize this tried-and-true company’s ability to carve out success, the stock is a great value pick.
That company, of course, was General Electric (NYSE:GE). GE stock would start 2017 above $30, and close the year below $17. By December 2018, the stock was re-testing financial crisis-era lows below $7.
Those quotes aren’t meant to call out the specific authors. Like pretty much every other investor, I too have tried to time the bottom too early, or owned stocks that were value traps instead of value plays. I even saw some value in GE stock in late 2017 myself.
Rather, the point is that the ‘simple’ argument for MMM stock here just isn’t enough. A history of success does not guarantee a continuation of that success going forward. GE shows that. IBM (NYSE:IBM) shows that. So does Kraft Heinz (NASDAQ:KHC).
To be sure, that doesn’t mean MMM stock is going to lose 75% of its value, as did GE. But there are some similarities to the stories. JP Morgan Chase analyst Stephen Tusa has been mostly right in his long-running bearishness toward GE stock — and Tusa called 3M’s business model “broken” in a note last year.
GE’s earnings began to stall out before finally reversing in 2018. 3M’s guidance for adjusted net income at the midpoint of 2020 suggests a decline from 2017 levels. That guidance doesn’t appear to include much, if any, impact from coronavirus fears: chief executive officer Mike Roman said at the time of the fourth quarter conference call last month that 3M expected a return to revenue growth in China this year. That outlook will almost certainly change after this week’s precipitous drop in the Dow Jones Industrial Average.
This is a stock that’s been headed in the wrong direction since late 2017, dropping 40% from its highs. At the least, 3M has a lot of work left to do to reverse those declines. A history of dividend increases, on its own, doesn’t make that work any easier.
Certainly, it’s equally too simplistic to write off 3M altogether. Long-term, there is a case for a turnaround — and a valuation that doesn’t incorporate much in the way of success on that front.
But it’s exceedingly difficult to make the case for buying MMM stock on this specific dip as global markets seize up. Again, by management’s own admission, two key areas of weakness have been automotive and the Chinese market. Pandemic fears are only going to exacerbate those trouble spots.
Revenue in China and Hong Kong declined 4% in local currency in 2019, according to a Form 10-K the company filed with the U.S. Securities and Exchange Commission. Right now, it seems like 2020 will be worse — potentially much worse.
Automotive stocks Ford (NYSE:F) and General Motors (NYSE:GM) both declined over 4% on Monday. Ford is challenging a multi-year low; GM is not far from doing the same. Those moves hardly suggest a recovery in that key market.
As a result, 3M is starting to look like a 2021 story at the earliest. And if those end markets outperform, there are better ways to play it. F and GM are much cheaper. China-exposed plays like Apple (NASDAQ:AAPL) or Starbucks (NASDAQ:SBUX) have sold off. Some Chinese names have fallen further.
In fact, the entire market is cheaper after Monday’s trading. In fact, every one of the 30 Dow Jones Industrial Average components declined. Incredibly, the 2.8% decline in MMM stock actually was in the top half of the index.
There’s no shortage of “buy the dip” opportunities out there right now. It’s hard to make the case that 3M stock is one of the most attractive. There are real problems here, which are likely to get worse in 2020. At the very least, there’s no need to rush.
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