3M outlook revised to stable due to reduced leverage, S&P affirms ratings

Investing.com -- S&P Global Ratings has revised the outlook for 3M Co. (NYSE:MMM) from negative to stable, citing a decrease in the company’s debt leverage. The ratings agency has also affirmed the ’BBB+’ long-term issuer credit rating and ’A-2’ short-term issuer rating for the company. This comes after the company’s debt leverage remained below the 3x downgrade threshold at the end of 2024.

The revised outlook is based on S&P’s belief that 3M can maintain a debt leverage of around 2.5x over the next 12 to 24 months. The company is planning to increase earnings through innovation and productivity while also managing large litigation obligations and shareholder returns.

3M’s credit ratios have stabilized following several years of financial and strategic disruptions. The company ended 2024 with an S&P Global Ratings-adjusted debt to EBITDA ratio of 2.6x, below the 3x downgrade threshold. This improvement was due in part to the non-materialization of unexpected litigation costs and restructuring, which were factored into the 2024 EBITDA forecast.

The company is expected to generate stable earnings, supporting good cash flow and improved credit ratios, even after funding more than $8 billion in obligations for PFAS and Combat Arms between 2025 and 2027. 3M is working towards boosting organic revenue growth and improving efficiency to offset several years of slow revenue growth.

Despite the lack of significant revenue and profit rebound, S&P believes that the company’s strong cash flow will be sufficient to fund large, ongoing settlement payments. With an estimated $6.5 billion of annual EBITDA over the next three years, the company is predicted to have funds from operations (after interest and cash taxes) of about $5 billion per year. This will supplement cash and short-term investments of $7.7 billion as of December 31, 2024.

These cash resources are expected to cover about $1 billion of annual capital expenditures, as well as settlement payments of $3.1 billion in 2025, $1.8 billion in 2026, and $3.4 billion in 2027. At the same time, 3M is aiming to increase its $1.6 billion dividend and deliver $1.5 billion of share buybacks annually over the next three years.

S&P anticipates that 3M will refinance its long-term debt, and further deleveraging will rely on earnings growth and reduced liabilities from legal settlements. The company’s commitment to shareholder returns over the next few years will likely consume excess cash flow.

In terms of growth, the company is focusing on product development and manufacturing efficiency. 3M has a wide range of products with numerous market-leading brands. However, many of its products are in mature, slow-growing sub-segments that face commoditization and intense competition. To counter this, 3M is prioritizing R&D spending to accelerate new product introductions.

The company is also planning to streamline manufacturing and increase productivity with more integrated operations. This comes after the company spun off Solventum last year, which led to the removal of one notch of rating uplift for diversification. In line with this strategy, modest levels of acquisitions, mainly aimed at adjacent markets, and divestitures that prune less compatible businesses are expected.

3M’s litigation settlements account for more than half of its S&P Global Ratings-adjusted debt. These obligations amounted to about $10.1 billion at the end of 2024, down from $13.3 billion at the end of 2023. The company is using its large cash holdings to fund these obligations through 2036.

The stable outlook reflects S&P’s view that 3M can maintain its debt leverage (S&P Global Ratings-adjusted) around 2.5x in the next 12-24 months. However, the rating could be lowered if 3M’s adjusted debt to EBITDA rises above 3x for a year or two due to weak earnings, larger shareholder distributions, or additional obligations to settle environmental matters. On the other hand, an upgrade is unlikely in the next two years unless the company’s adjusted debt to EBITDA improves to below 2x.

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