Shares in industrial conglomerate 3M (NYSE: MMM) rose by slightly more than 10% in December, according to data provided by S&P Global Market Intelligence. The move comes as the market priced in a better growth environment in 2024 due to anticipated interest rate cuts in 2024.
A better growth environment for 3M?
While there’s no guarantee the Federal Reserve will reverse interest rate hikes this year, the market has merrily assumed it will, as 10-year Treasury yields fell from touching 5% in late October to slightly below 4% at the time of writing.
For several reasons, a better economic growth outlook is music to the ears of 3M shareholders.
First, the company has significant exposure to interest rate-sensitive sectors, such as consumer electronics, automotives, construction, and home improvement goods. Moreover, its adhesives, abrasives, advanced materials, and electronics materials are widely used across the industrial sector. These are all markets that rely on economic growth.
Second, 3M is on track to spin off its healthcare segment, Solventum, in the first half of 2024. 3M will retain a 19.9% stake in Solventum, which could be used to raise cash in the future. The spin-off will remove a stable and less economically sensitive earnings and cash-flow source. As such, the remaining 3M company will be more cyclical than the current version.
Is 3M a recovery stock for 2024?
The company is undoubtedly attractive as a turnaround play, not least as management is cutting costs and repositioning the company for growth. Indeed, as previously discussed, management is starting to turn around its lackluster performance on margins in recent years thanks to its restructuring activities.
That said, there are still some question marks around the stock. Unfortunately, its management does not have an excellent track record of meeting its sales guidance, let alone beating it. Moreover, buying a high-yielding stock (3M currently yields 5.6%) is always a mistake without carefully assessing just how sustainable the dividend is.
For example, the trailing-12-month dividend payout is $3.3 billion , and Wall Street analysts are forecasting $4.5 billion in free cash flow in 2023 with $4.3 billion in 2024 and $4.7 billion in 2025.
While these figures (which include the healthcare segment) suggest the dividend is sustainable, 3M will spin off the healthcare segment in 2024 and has multibillion-dollar and multiyear cash calls coming from legal settlements relating to its production and use of PFAS chemicals and its combat arms earplugs.
Management probably will not want to cut the dividend, and it has the 19.9% stake in Solventum as potential firepower, but the 3M board may not feel the same way about matters. As such, it makes sense to wait and see 3M’s outlook for 2024 and its capital allocation policy before diving into the stock.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.
Why 3M Shares Surged in December was originally published by The Motley Fool
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