How many multibillion-dollar settlements does 3M Co. need before it can move on from its myriad legal woes? Definitely more than one, and therein lies the problem with owning shares of the maker of Post-it notes, automotive adhesives, and N95 masks.
Last week, 3M announced a deal to pay as much as $12.5 billion over 13 years to resolve lawsuits from US cities that contend their drinking water supplies were polluted by per- and polyfluoroalkyl substances (PFAS) made by the company. These substances are known as “forever chemicals” because they break down slowly in the environment and can accumulate in the body and cause health problems. The settlement requires 3M to pay a minimum of $10.5 billion to treat and test water supplies and extends to municipalities that may detect PFAS at any level in the coming years. When the Environmental Protection Agency in March proposed the first national drinking water standards for PFAS, it set the barometer for two of the more problematic compounds at 4 parts per trillion, essentially the lowest level that can be reliably measured. If finalized, the EPA’s proposed regulation will force public water systems to monitor for PFAS and reduce contamination if levels exceed the new standards. The settlement, which 3M says isn’t an admission of liability, essentially means the company will foot that bill for drinking-water utilities.
Chief Executive Officer Mike Roman hailed the deal as “an important step forward” for the company. He’s right: After a more than $50 billion slide in 3M’s market value during Roman’s tenure, mostly because of the company’s legal challenges, any progress is welcome for shareholders. But the drinking-water settlement payments will absorb most of 3M’s post-dividend free cash flow for the next decade — and that’s if the annual contributions from the healthcare unit that the company is intending to spin off are included, according to estimates from Barclays Plc analyst Julian Mitchell. 3M currently offers a $1.50 per share quarterly dividend and last year paid out $3.4 billion to shareholders. If the health-care unit takes on a proportionate share of that payout upon its planned separation later this year, the remaining 3M businesses won’t have enough cash left over after the expected front-loaded water settlement payouts to support keeping the overall dividend whole, Wolfe Research analyst Nigel Coe wrote in a note. 3M could borrow to fund the settlement payouts, but its debt load will balloon relative to the smaller profit pool that will remain once the healthcare business is carved out.
That situation, while tenuous, could be sustainable for a limited period if this was the end of 3M’s legal challenges. But the company has resolved only a portion of its PFAS liability with the water systems settlement. Among the PFAS items that are potentially still outstanding are claims from state attorneys general, the federal EPA and US military, foreign governments such as Belgium and the Netherlands, personal injury and property lawsuits from the broader population, the cost of cleaning up areas near 3M’s legacy PFAS manufacturing sites and legal action from commercial and industrial customers that were supplied with PFAS by the company. RBC analyst Deane Dray says last week’s settlement is focused on drinking water and doesn’t appear to extend to wastewater utilities, which may require a separate payout. Mitchell of Barclays estimates there are an additional $16 billion of potential PFAS liabilities for 3M that are yet to be settled.
Separately, 3M is facing more than 200,000 lawsuits contending that the company knowingly sold defective military earplugs through its Aearo Technologies subsidiary, leaving service members with hearing loss and tinnitus. Plaintiffs were increasingly winning bellwether trials before 3M announced in July that it would put the Aearo subsidiary into bankruptcy to speed up the resolution of their claims. A judge threw out the case earlier this month, finding that Aearo’s filing didn’t serve a valid reorganization purpose. 3M has said that the earplugs were safe and effective. Aearo can appeal the bankruptcy dismissal, but analysts have said the most realistic outcome is a negotiated settlement. Estimates for 3M’s total liability for the military earplugs have hovered in the ballpark of $10 billion.
