3M: a defensive stock worth sticking with

The $100 billion US conglomerate should fare pretty well as we come out of the coronavirus crisis, argues our international investing expert.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

Among companies faring comparatively well, or even better than usual, during the coronavirus crisis are some that you would not particularly expect. Step forward American multinational conglomerate 3M (NYSE:MMM).

Many people remember it as a supplier of stationery such as sticky tape and Post-it notes, which would hardly get investors excited in the current economic climate. But this is a much, much bigger company with interests in industrial products, healthcare, worker safety and consumer goods, a wide enough spread to ensure that there will always be demand for at least some of its products whatever the circumstances.

Income actually rose in the first quarter of 2020, when most companies started to feel the effects of shutdowns in various parts of the world, but 3M saw demand for many of its products increase thanks to Covid-19. Total sales rose 2.7% compared with the start of 2019, with organic growth admittedly at a more mundane 0.3%. Most companies would have been happy with any level of growth in the first quarter. Pre-tax profit improved impressively from $1.1 billion to nearly $1.6 billion.

Not surprisingly, it was the healthcare business that shone, with sales up 21%, followed by consumer products gaining 4.6%. The setbacks came in safety, industrial, transport and electronics, but these could well bounce back as restrictions on working arrangements ease.

Source: interactive investor. Past performance is not a guide to future performance.

Chairman and chief executive Mike Roman admits that the financial impact of Covid-19 is inevitably varied across such a diverse business, and he has withdrawn earlier guidance for the full year, which included a forecast $9.30 to $9.75 in earnings per share.

The first-quarter figure was $2.22, up from an underlying $1.95 in the previous quarter, so it is touch and go whether that forecast can still be met.

Much depends on how well last year’s reorganisation works out. Streamlining the company structure brought a $134 million hit in the fourth quarter of 2019, mainly to cover the loss of 1,700 jobs. The idea is to give each of the four sections of the group autonomy over their entire global operations, rather than split the business along global lines, with each area setting priorities in their regions. Individual units now have full responsibility for all aspects of that part of the business across the globe.

It is too early to say whether this will work better, although it will allow for greater central control and it removes a layer of bureaucracy in the international operations organisation. Annual pre-tax savings are projected at $110-120 million eventually, with $40-50 million achieved this year.

The other major imponderable is litigation arising from discontinued businesses. Discussions continue with various litigants, but $214 million was set aside at the end of last year to cover the costs. Litigation doesn’t come cheap in the US.

These charges spoilt otherwise satisfactory results for 2019, with sales up 2% and underlying profits marginally lower. The best-performing area last year was the home territory of the US, where sales grew 7.4%.

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There has of late been some concern about the sluggish level of organic growth, the maturing of some markets and weakness in the vehicle and semiconductor markets served by many of 3M’s products. However, 3M is a defensive stock that should fare comparatively well as we come out of the coronavirus crisis.

This month 3M recruited a new chief financial officer, Monish Patolawala, who is currently in a similar position at GE Healthcare, part of General Electric. He joins on 1 July and there will be an orderly one-month handover from outgoing CFO Nick Gangestad.

Hobson’s choice: The shares topped $250 briefly in January 2018 before starting a long slide to a low of $125 in mid-March, losing half their value. They have since picked up to $167 and should manage to reach $180 if the general market recovery continues. Buy up to that level.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.