3M (NYSE: MMM) is an interesting speculation on high-yield dividend growth and value, and now is an excellent time to take a bite. The company is navigating a difficult time with aplomb, and the market is putting in a bottom. The critical elements include the removal of uncertainty, a clearer financial outlook, a market-leading dividend yield, and a deep value for investors.

The risk is that a dividend cut may come, but a mitigating factor exists. If it comes, the dividend cut is most likely priced into the market, which is set up for a rebound this year. 

#1 - 3M Reaches Settlement in Hearing Loss Case 

Among 3M’s largest sources of uncertainty is the case concerning ear plugs and hearing loss. After years of litigation, the case is coming to a close. 3M reached a settlement for $6 billion that the board has approved. This is about half the expected $10 to $15 billion punted by analysts, dramatically changing the financial outlook. The money will paid out over 5 years; analysts view it as a positive. 

#2 - 3M Reaches Settlement in Forever Chemical Case 

Another headwind for 3M involves the use of forever chemicals or PFAS. 3M used forever chemicals to manufacture various products, including fire-fighting foam and non-stick coatings. The settlement is worth $12.5 billion and will be paid out over 13 years. Money will help municipalities test for and clean up suspected chemicals. Regarding revenue and earnings, the combined settlements are worth about 56% of the 2023 consensus revenue target and $33.50 per share in earnings. 

The company’s cash flow is robust. FCF is up significantly in 2023 and is expected to remain strong for the foreseeable future. The $1.5 billion reported for Q2 is sufficient to continue paying dividends and pay the settlements with the aid of the balance sheet. Dividends were worth $828 million in the quarter, leaving a significant amount available for “other” purposes.

The roughly $0.7 billion leftover, if only used to pay settlement costs, could take care of the $18.5 billion in less than 6 years, and the pre-tax charge for PFAS has already been logged.

#3 - 3M Pays a Royally Good Dividend 

3M is among the highest-quality Dividend Kings and has increased its payout annually for over 60 years. There is some concern that the company may need to cut the payment, but the risk is minimal now. The costs of settlements and payout ratio, about 65% of the Marketbeat.com consensus earnings estimate, may keep the pace of distribution increases low, but the 2.6% CAGR is sustainable.

Among the takeaways from the Q2 report were top and bottom-line outperformance and an increase in guidance. 

#4- 3M is a Value to Investors 

3M offers value to investors. Not only does it pay a high 6% dividend yield, the stock trades at a low 12X earnings. That’s below the S&P 500 (NYSEARCA: SPY) average and well below what investors typically pay for a Dividend King. Names like Stanley Black & Decker (NYSE: SWK) and The Coca-Cola Company (NYSE: KO) trade in a range of 18X to 25X while paying much lower yields, and there is a spin-off in the works. 

#5 - 3M Will Spin Off Medical Unit 

3M will spin off its medical unit this fall. The spin-off includes 3M med-tech units worth $8.4 billion in revenue in 2022. That puts it low on the list of med-tech companies regarding revenue, which is an opportunity for growth. Names like Baxter (NYSE: BAX), Stryker (NYSE: SYK), and Boston Scientific (NYSE: BSX) are doing about 1.5X the business, while Medtronic (NYSE: MDT) and Abbott Laboratories (NYSE: ABT), which is more diversified, are 4 and 5 times as large.

These stocks also trade at considerably higher valuations, trading 15X to 27X their earnings. The spin-off should unlock value for shareholders. 

The Technical Outlook: 3M Bottoms at Decade Low 

The chart of 3M isn’t pretty. The market has trended lower for years due to the looming lawsuits that are now mostly completed. Price action appears to be putting in a bottom because of the altering outlook and a rebound could be coming. Price action is up following the board’s approval of the earplug settlement, and a move above the 150-day EMA is imminent. In that scenario, the market could enter a complete reversal and trend higher through the end of the year.