This story was originally published here.
It’s been a thrilling week for long-term investors and short-term traders alike. And one stock, 3M (NYSE:MMM) has gotten onto both groups’ radars. MMM stock recently hit its lowest level in years, attracting the interest of deep value investors. Meanwhile, its business making face masks to fight contagious diseases has excited the trading crowd.
There’s good news and bad news with that.
For one, the company is, in fact, a value at this point and should offer particular interest to investors seeking safe strong dividends. On the other hand, people buying for a rally on extra coronavirus sales are bound to be disappointed. Here’s what you need to know.
Don’t Get Too Excited About Face Masks
Traders gave 3M a little hype at the end of the last week thanks to its respiratory mask business. At first glance, that makes a good deal of sense. 3M is one of the leading producers of personal safety equipment. That includes these sorts of filtration devices for medical and industrial uses and the popular N95 masks in particular.
It’s no secret that the masks are in high demand now, and prices are soaring. Wired reported that the price of a box of 20 3M particulate respirators has surged from $17 to $70 since the virus’ outbreak. Not surprisingly, with demand going up, suppliers such as 3M are preparing to boost production.
To that end, over the weekend, Vice President Mike Pence said about the government’s virus response team: “We’ve contracted now with 3M to — 35 million more masks per month will be produced, and we’re also going to be working with other manufacturers.”
It’s unclear if all these will come from 3M or not, as 3M couldn’t confirm receiving an official order of that size. Regardless, 3M will be able to sell way more of these respirators in the coming months.
That said, let’s pump the brakes here for a second. 3M said that it hasn’t raised the prices of its masks, even as independent distributors have sharply raised prices on sites such as Amazon (NASDAQ:AMZN). Thus, retail price was something like $1 or less per mask, and 3M would receive even less than that selling at wholesale price. So we’re talking something in the tens of millions of dollars of revenue here. Compare Brokers
By contrast, 3M currently sells $32 billion a year of products. So this increased coronavirus mask demand will be a mere rounding error in 3M’s results. Meanwhile, other parts of the business are likely to slow if the economy takes a hit, more than canceling out this modest sales increase.
3M Is an Excellent Business
While the coronavirus simply isn’t going to be a huge sales driver for 3M stock, investors should still give the company a look. It’s one of the finest collections of American brands out there. 3M spans health care, safety, office supplies, and many other consumer and industrial goods, selling everything from Post-It notes to dental equipment.
As such, 3M is a strong reputable blue chip that gives you exposure to a wide swath of American (and international) economic activity, and the stock is on a big sale now. Shares are down from a 52-week high of $220 to around $150. In fact, 3M stock last traded this cheaply back in 2015. When people talk about waiting for a big correction to put their cash to work, this is exactly the sort of situation that comes to mind.
3M’s Dividend Is on the Rise
One of the main attractions to 3M stock is that it is a dividend aristocrat. In fact, the company has increased its annual dividend a stunning 61 years in a row. As you might expect, all those dividend hikes add up to a formidable yield. Combined with the share price drop, 3M stock is now paying out a 3.9% dividend yield.
That sounds good on its own, and context makes it even sweeter. Consider that 3M is usually a relatively low-yielding stock as investors pay a premium for the company’s strong growth history. In fact, over the past 30 years, there have only been three occasions when you could buy 3M stock for a 3.9% dividend yield: 1991, 2009 and right now.
MMM Stock Verdict
There’s no guarantee that history will repeat. Historically, however, buying 3M stock on major pullbacks has been a good decision. And make no mistake, this is a high level of pessimism around 3M and the broader economy that we’re seeing right now. The only other times 3M stock yielded this much, it was a fantastic buying opportunity.
Other valuation numbers confirm that idea. The forward PE ratio, for example, is down to 15.6x after running above 20 for much of recent history. While 3M stock could certainly get cheaper in the short-run, for long-term investors, this looks like a solid entry point. Just don’t expect miracles from coronavirus mask production. That’s a sideshow – the main story will be a great company recovering to a more robust valuation as the current market panic starts to recede.
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