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3M dividend cut? Stop MMM spin-off plan for food safety business, say veterans behind $100bn earplug lawsuit

By Jenny McCall

11:30, 5 September 2022

A image of the 3M logo displayed on a tablet
Two veterans are reportedly suing 3M to block the planned spin-off -Photo: Getty Images

3M (MMM) will be facing a few challenges over the coming months and years, as it plans to spin-off its food safety business Garden SpinCo and merge the business with Neogen (NEOG).  

Adding to 3M's misery are the accusations from the US military that the group sold defective earplugs and now two veterans are reportedly suing 3M to block the planned spin-off, which may lead MMM to cut its dividend.

According to Reuters, the veterans claim that 3M’s earplugs failed to protect their hearing during combat and training.

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Litigation woes

MMM share price has been down 31% this year, as it faces more than 230,000 lawsuits from military veterans who complained about its Combat Arms Earplugs Version 2, which left many service members with tinnitus and hearing loss.

The litigation, which started back in 2018, after a whistle-blower filed a lawsuit against 3M (MMM) revealing allegations that 3M and its subsidiary, Aearo Technologies had knowingly sold defective dual-ended Combat Arms earplugs to the United States Military. This case resulted in a $9.1m (£7.9m) settlement with the Department of Justice.

On 20 May 2022, a jury in Penscola, Florida ordered MMM to pay $77.5m to a US Army veteran named James Beal, who claimed he had suffered hearing damage due to the earplugs.

Testifying before the court in August, corporate solvency expert J.B. Heaton said the lawsuits could force 3M (MMM) into bankruptcy.

“It is more and more likely within the next several years we’ll see a 3M (MMM) bankruptcy,” Heaton said before the court, according to reporting from Bloomberg.

Aearo Technologies announced on 26 July that it will be filing for bankruptcy protection, as it seeks to settle the lawsuits. The move was made to try and protect 3M from any litigation, however, on 1 August, this move was blocked and only Aearo Technologies is protected by the automatic bankruptcy stay.

On 26 August US Bankruptcy Judge Jeffrey J. Graham ruled that 3M will not get bankruptcy protection because its subsidiary declared bankruptcy. 3M appealed this move on 31 August.

“We are disappointed in the court’s ruling today and will be filing an appeal. Further litigation in the multi-district litigation court benefits no one," 3M said in a statement. 

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Analysts believe that 3M’s only hope is to settle these cases.

“3M (MMM) has every incentive to seek a settlement in that scenario. Litigating these cases is not a realistic scenario,” Nigel Coe, an analyst at Wolfe Research said.

 

Possible cut to 3M (MMM) dividend

But the litigation is not the only issue 3M faces. The group will also have to look at whether it will have to cut its dividend. Nicholas Heymann, an analyst at William Blair, has said that investors are concerned about whether MMM will have to cut its dividend once it spins-off its food health business.

According to a report in Barrons, Heymann is expecting 3M (MMM) to bring in approximately $6bn in free cash flow in 2023 once its demerger is complete from Garden SpinCo.

Heymann claims that about $1.5bn of that free cash will come from its healthcare business and the remaining $4.5bn left after the spin-off, would still cover the dividend pay-out of $3.4bn. However, the concern comes from the mounting litigation woes that the group is now facing. If 3M (MMM) had been granted bankruptcy protection, the total liability would have been capped at $1bn.

With that said, 3M (MMM) is committed – it seems, to its dividend pay-out. 3M (MMM) CEO, Mike Roman said: “It is a high priority for us and continues to be so.” The group recently paid a quarterly dividend of $1.49 a share. Heymann stresses that the dividend is key for MMM right now.

“The dividend is what folks are asking about, the shares are off about 30% this year, a loss of 50% from the record high it reached in 2018,” Heymann said.

It has also been reported by Bloomberg that some plaintiff advocates have requested that Judge Graham freeze 3M dividends and share buybcak programs

If the veterans succeed in their quest to block the spin-off then this will add more pressure to MMM and could lead to a dividend cut.

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