3M Co. has so many big problems on its hands that one veteran Wall Street analyst likened the conglomerate’s challenges to the Titanic — just after the iceberg.
(Bloomberg) — 3M Co. has so many big problems on its hands that one veteran Wall Street analyst likened the conglomerate’s challenges to the Titanic — just after the iceberg.
“We’re talking more about rearranging the deckchairs when you’ve got these big calamities bearing down on the company,” said Deane Dray, an RBC Capital Markets analyst who has covered 3M for nearly 20 years.
That may sound like hyperbole for one of the longest-tenured components of the Dow Jones Industrial Average that generates more than $30 billion in sales and showers investors with $3 billion in annual dividends. Yet the magnitude of what 3M is confronting is immense.
Wall Street expects 3M will post its sixth-straight quarter of declining sales when it reports results on Tuesday as demand continues to slump across much of its vast portfolio. The bigger worry is that potentially billions of dollars in legal liabilities will consume huge amounts of cash for years to come and put its cherished dividend at risk.
The company, based in St. Paul, Minnesota, is a central defendant in a sprawling courtroom brawl over so-called forever chemicals that stands to be one of the largest pollution cases in history. It recently agreed to pay out as much as $12.5 billion for just one tranche of claims it faces over the chemicals, with several more remaining.
It’s also in confidential mediation to resolve more than 200,000 lawsuits alleging faulty earplugs it supplied to US combat troops led to hearing damage. Analysts expect a resolution to cost several billions of dollars on its own.
All that leaves Chief Executive Officer Mike Roman, a 35-year company veteran who became CEO five years ago, few tools at his disposal to break 3M out of its morass. Investors have already taken a hit, with the stock down 13% this year to cap a more than 50% rout during his tenure.
“The stock is uninvestible given the current circumstances,” said Dray, who has the equivalent of a sell rating on the company.
Signs of Hope?
3M hasn’t been standing still, though. It has cut thousands of jobs – including about 8,500 planned this year alone – in a sweeping push to streamline operations and slash costs through multiple rounds of restructuring since Roman became CEO. The latest initiative, announced in April, is expected to reduce expenses by as much $900 million a year.
At the same time, it’s investing in products for growing sectors such as electric vehicles, where it already has a $500 million business.
“These are markets that rely on technology and rely on material science,” John Banovetz, the company’s chief technology officer, said in an interview. 3M “can play a big role.”
3M’s plan to spin off its massive health-care products division by early next year should deliver a war chest of about $10 billion or more to help wade through its costly legal liabilities.
This is quite a turn for a company with more than 80,000 employees and a market value that once topped $150 billion. (It’s lost almost two-thirds of that since 2018.) Founded in 1902 as Minnesota Mining and Manufacturing, 3M became a household name by introducing a dizzying array of products — from Post-it notes to Scotch tape — that became mainstays in homes and businesses.
The iconic manufacturer earned a good reputation with investors by generating healthy cash flows and a 65-year streak of increasing its dividend.
Maintaining the dividend and making plans to raise cash has done little so far to put investors at ease. Not a single analyst has a buy rating on 3M shares; 16 rate the stock the equivalent of hold while four recommend selling.
The company last month agreed to pay as much as $12.5 billion over 13 years to resolve claims by drinking water utilities that PFAS chemicals it made for decades polluted towns across the US.
Paying out those obligations while maintaining its generous dividend will squeeze the remaining company’s annual free cash flow to less than $1 billion on average for the next decade, said Evelyn Chow, a portfolio manager at Neuberger Berman Group LLC, which owns about 1.8 million 3M shares.
That amount is “a lot less than ideal and probably indicates that further portfolio action has to be considered, maybe is necessary,” she said in an interview. “I would be hard pressed to imagine 3M as a portfolio is the same in 2026 versus 2023.”
The proposed PFAS settlement announced in June only covers claims by drinking water providers. The company continues to face thousands of unresolved lawsuits from states, individuals and other entities.
Barclays analyst Julian Mitchell estimated other PFAS-related liabilities could be worth $16 billion, plus another $8 billion to resolve the earplug lawsuits, itself the largest mass-tort in US history, he said in a June research note.
After the spinoff, RBC’s Dray expects 3M to reduce its dividend by more than a proportional amount to account for the loss of the health care division.
“They’ll cut it by a lot more to preserve cash while they’re paying out large settlements,” he said.
3M declined to comment on how it plans to manage its dividend. Roman has said that the dividend will continue to be among 3M’s top capital allocation priorities.
As 3M’s courtroom slog continues, investors are likely in for more lackluster results.
Analysts projected 3M second-quarter sales fell 9.5% compared to the prior year, according to an average of estimates. Meanwhile, a broader group of its peers is expected to boost sales closer to 9%, according to Melius Research. The bottom line doesn’t look much better, with adjusted earnings estimated to fall 13%, according to data compiled by Bloomberg.
3M has been punished by the highest inflation in decades, and it has large exposure to categories, such as consumer electronics and virus-filtering N95 masks, that boomed early in the pandemic but have since slumped.
“All of those market dynamics are impacting our business,” Roman said in May. “It doesn’t change our strategy, but it certainly focuses us on those trends in the marketplace.”
3M spends more than 5% of its sales on research and development, far more than its peers. Maintaining those outlays and capital expenditures will remain top priorities to boost sales, according to Roman.
But the company’s run of uneven organic growth, a measure of sales excluding the impact of acquisitions and exchange rates, has raised doubts about whether its once-impressive innovation engine can revive results.
The reason for the disconnect between 3M’s sector-high R&D spending and its spotty growth “is really unclear,” Chow said. “That’s been a perennial question that nobody has been able to answer about 3M.”
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