3M Nearing Earplug Settlement; No Major Change to Dividend Risk Profile as Odds of a Cut Remain Elevated

Rumors emerged over the weekend that 3M is nearing a $5.5 billion settlement agreement with military earplug claimants.

This settlement amount, while steep, is around $3 billion to $10 billion lower than many analysts were expecting, sending 3M's shares up around 5% Monday morning.

While we're happy to see more progress made on the litigation front, the news doesn't change the outlook we shared last week, which assumed at least an additional $10 billion in settlements for PFAS and military earplugs.

And 3M is not out of the litigation woods yet. There are other pending PFAS lawsuits filed by state attorneys, the federal government, and individuals claiming personal injury and property damage, not to mention substantial cleanup costs for these so-called forever chemicals that will likely be in the billions.

Overall, 3M's litigation overhang remains a sizable risk for the company's future dividend coverage (we estimate 3M's annual cash flow deficit will now likely top $1 billion starting in 2024) and balance sheet. 

For a more in-depth analysis of 3M's dividend profile, liability risks, and our thoughts on the health care spinoff, check out this article we published last week.

Because this settlement does not meaningfully change the outlook for 3M's future dividend coverage and leverage compared to our initial expectations, we are reaffirming the company's Unsafe Dividend Safety Score.

While 3M will have a large pile of cash after spinning off its health care segment, would management really be willing to dip into these reserves for years just to protect the dividend (and at the expense of improving the balance sheet faster and making more growth investments)?

Or would right-sizing the dividend by 20% to 40% be prudent and somewhat more palatable if it comes alongside news that these key lawsuits are now ring-fenced and behind 3M?

We would bet on the latter but always root for a dividend aristocrat to get back on track and keep its growth streak alive.

With so many moving pieces to 3M's story, we'll keep a close eye on litigation developments and news surrounding the health care spinoff that could further alter the dividend's outlook, providing updates as needed.