Should You Buy 3M Before April 1?

Investors interested in industrial giant 3M (NYSE: MMM) should circle April 1 on their calendar. That’s the day the company plans to complete the spinoff of its healthcare business, Solventum. The company will distribute 80.1% of the shares to its existing investors. It will retain the remaining 19.9% of Solventum, which it intends to monetize within the next five years.

With that stock spinoff looming, you might wonder whether you should buy shares of 3M now. Here’s why it’s better to wait until after April 1 if you really want to purchase shares of the beaten-down industrial conglomerate or its healthcare unit.

It’s likely too late to take Solventum for a spin

3M’s board of directors approved the spinoff of its healthcare business earlier this month. It expects Solventum to trade on the New York Stock Exchange under the stock ticker SOLV starting April 1. Existing 3M shareholders will get one share of Solventum for every four shares of 3M they own as of the record date for the distribution, which was March 18.

Because that date has already passed, investors who buy 3M stock between now and April 1 might not receive shares of Solventum. The company noted in a press release that there will be two markets for 3M stock from March 26 through March 28. Some shares will trade with the right to receive Solventum stock, while others won’t have that right. Because of that potential confusion, investors are better off waiting to buy shares.

Patience could pay off with a lower price

Another reason to be patient is that you could get a better deal on Solventum stock if you wait. Stock spinoffs tend to trade lower in the months following the transaction as existing investors unload shares of a company they don’t want to own. That has been the case for Johnson & Johnson‘s consumer health products spinoff, Kenvue:

KVUE Chart

KVUE data by YCharts

As that chart shows, Kenvue has lost a quarter of its value since its initial separation from Johnson & Johnson last year. Solventum could face a similar fate.

Likewise, investors interested in owning what remains of 3M could fetch a better price by waiting. Shares could face the same selling pressure as Solventum because investors who only want to own the spun-off entity could sell out of their remaining position in the industrial giant.

On top of that, there’s another potential downside catalyst. 3M might opt to reset its high-yielding dividend after spinning off Solventum, which contributed a quarter of its revenue and earnings. We saw a similar outcome with W.P. Carey after the diversified REIT spun off its office properties into a new office-focused REIT, Net Lease Office Properties, last year. W.P. Carey reset its dividend by reducing it by about 20% to reflect its lower post-spin earnings and a desire for a lower dividend payout ratio to fund new investments. 3M could consider a similar reset to reflect its reduced earnings and to have a lower payout ratio to help fund its legal settlements and for other priorities like funding growth, repurchasing shares, or strengthening its balance sheet.

Upside catalysts abound after the spin

While waiting seems like the wise move right now, there are some compelling reasons to consider buying 3M after it completes the Solventum spinoff. The company recently hired a new CEO who will take over in May. On top of that, the electronics market is starting to recover, and the company has agreed to settle most of its legal liabilities.

These catalysts could help boost the company’s sagging valuation. 3M currently trades at about 11 times earnings, well below the 19 times it fetched five years ago. That low valuation is a big reason 3M currently offers such a high 5.8% dividend yield. Its valuation should improve as the company starts turning around its sagging earnings and puts its legal troubles in the rearview mirror.

Time to be patient

It’s too late for investors to ensure they get shares of Solventum by purchasing 3M stock. Because of that, those interested in either company are better off waiting until after April 1 to buy shares. That patience could pay off since shares of both companies could decline following the transaction. Furthermore, interested investors will have more information about the future of 3M’s dividend.

Should you invest $1,000 in 3M right now?

Before you buy stock in 3M, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and 3M wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks

*Stock Advisor returns as of March 20, 2024

Matt DiLallo has positions in 3M, Johnson & Johnson, Kenvue, Net Lease Office Properties, and W.P. Carey. The Motley Fool has positions in and recommends Kenvue. The Motley Fool recommends 3M, Johnson & Johnson, and W.P. Carey and recommends the following options: long January 2026 $13 calls on Kenvue. The Motley Fool has a disclosure policy.

Should You Buy 3M Before April 1? was originally published by The Motley Fool