By Shares of 3M Co. experienced a significant rally on Tuesday following a recommendation by BofA Securities analyst Andrew Obin. Holding a positive outlook on the consumer, industrial, and health care products company, Obin advised investors to hold off on selling shares ahead of the upcoming earnings report.
To reflect the potential for several near-term catalysts, Obin raised his rating on the stock from underperform to neutral. His price target for 3M Co.’s stock remains at $110, indicating a potential 9% upside from the current levels.
The timing of this upgrade is noteworthy, as the company is scheduled to release its second-quarter results in two weeks. Known for its popular product brands such as Post-it Notes, Scotch tape, and N95 facemasks, 3M Co. has been gaining momentum.
In morning trading, the company’s stock climbed 3.7%, outpacing gains in the Dow Jones Industrial Average. It currently sits 8.0% above its lowest close since December 31, 2012, providing further optimism for investors.
One of the factors contributing to this positive outlook is the recent announcement of a $10.3 billion settlement in June. This settlement addresses claims related to dangerous substances found in drinking water, demonstrating that the amount was lower than anticipated. Although litigation risks still exist, historically, stocks with litigation risks have performed well following initial settlement announcements.
In a note to clients, Obin emphasized how the initial settlement helps provide clarity on potential scenarios for the remaining litigation related to these substances. As a result, this improved understanding benefits the company’s overall valuation.
Overall, with balanced risks and several near-term catalysts on the horizon, 3M Co. is well-positioned for future success. Investors are urged to consider holding onto their shares as the company prepares to announce its second-quarter results.
3M’s Outlook Optimistic for Potential Settlement in Combat Arms Earplugs Case
3M, a multinational conglomerate, is still facing litigation related to its Combat Arms earplugs. Despite the ongoing legal challenges, CFO Mike Obin expressed optimism for a potential settlement in the second half of 2023.
Positive Developments: Spinning Off Health Care Business
In addition to the legal issues, 3M has plans to create two public companies by spinning off its health care business by the end of this year. This strategic move is expected to unlock shareholder value. Obin believes that 3M’s retained 19.9% stake in the health care business will result in approximately $8 billion in cash and an additional $5 billion in equity.
Moreover, separating the health care business will provide a shield against the current litigation faced by 3M.
Impact on Dividends and Stock Performance
However, one potential downside of the spinoff is that it may lead to a lower dividend for 3M shareholders. Currently, 3M shares offer an implied dividend yield of 5.96%, which is more than triple the implied yield of the S&P 500 index of 1.55%. This high dividend yield has played a significant role in supporting the stock’s performance, according to Obin.
Analyst Perspectives and Stock Performance
Following Obin’s positive outlook, out of the 19 analysts surveyed by FactSet who cover 3M, four still hold bearish views, while 15 others remain neutral on the stock.
Year-to-date, 3M’s stock has declined by 16.0%. In contrast, the S&P 500 has shown a gain of 15.1%, and the Dow has seen a modest increase of 2.8%.
Overall, 3M faces ongoing legal challenges with its Combat Arms earplugs, but the company remains hopeful for a potential settlement. The planned spinoff of its health care business is expected to unlock shareholder value, although it may result in a lower dividend. Analyst opinions on the stock vary, and the stock’s year-to-date performance has been less favorable compared to broader market indices.
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