3M Is Out, Find Other Dividend Stocks Instead

3M Company (MMM) got hammered on Friday afternoon after a federal judge ruled that 230,000 lawsuits for defective military earplugs can proceed against 3M despite the bankruptcy of its subsidiary that sold them. Leave drama behind and walk away.

In the Forbes Dividend Investor portfolio, the uncertainty surrounding 3M’s earplug lawsuits was a potent reminder to respect a 10% trailing stop loss as a signal to get out of the stock from which we just earned a dividend less than two weeks ago.

The Minneapolis-based conglomerate has had as much drama as the Coen brothers’ 1997 film Fargo. 3M’s Aearo Technologies subsidiary, facing a mountain of lawsuits stemming from faulty earplugs it sold to the military, filed for Chapter 11 bankruptcy protection two weeks ago in Indianapolis. The filing in the U.S. District Court for the Southern District of Indiana freezes all lawsuits against Aearo, which asked the judge to extend the protection to parent company 3M. On Friday, he denied the preliminary injunction to ongoing litigation against 3M.

A statement from 3M issued Friday afternoon says that Aearo will appeal the decision as it continues in chapter 11 proceedings. “3M also will continue to vigorously defend its position in the multi-district litigation and in its appeals in that litigation,” according to the statement.

An adviser for plaintiffs had told the judge that 3M faces the potential for more than $100 billion in payouts to veterans who experienced hearing loss due to wearing shoddy earplugs. This worst-case scenario would likely produce a bankruptcy of 3M, which maintains that a $1 billion fund it established should be adequate to pay legitimate claims from injured veterans.

Another bit of drama surrounds the sale of 3M’s food safety business to Michigan-based food and animal safety outfit Neogen (NEOG). Under terms of the deal, current 3M shareholders have until this Wednesday night, August 31, to elect whether to exchange all, some, or none of their MMM shares for NEOG stock to be purchased at a 7% discount. For every $100 of 3M stock, shareholders could receive $107.53 worth of Neogen stock, subject to an upper limit of 7.3515 NEOG shares per share of 3M.

Neogen, which trades near six-year lows, has never paid a dividend in its 33-year history as a public company. Because of this, it would not conform to the type of stocks I present favor, but I may be missing an opportunity: NEOG has seen a spate of recent insider buying.

Powell Promises Pain

Federal Reserve Chairman Jerome Powell at the Federal Reserve Bank of Kansas City’s annual Jackson Hole Economic Symposium on Friday morning delivered a terse address that reinforced the idea that the central bank is far from finished hiking interest rates in its quest to slay the inflation dragon. Stock market investors responded like middle-schoolers who had acted up with a substitute teacher for the past two months but now faced retribution from their real teacher’s return.

Against the weight of the stock market, crude oil climbed 3% and finished the week back above $93 per barrel, helping the energy sector stand out as the only positive weekly performer among domestic stocks. Energy was higher by 4.3% on the week and is now up 52.2% year-to-date.

Effervescence in the energy sector spilled over into pipeline master limited partnerships that comprise the Alerian MLP (AMLP +2.5%) ETF, which boasts a 32% year-to-date total return. Aside from the AMLP, every other nook and cranny of the equity income world was negative, although the VanEck BDC Income (BIZD -0.4%) lost the least.

High-yield dividend ETFs like WisdomTree High Dividend (DHS -2.0%) again outperformed dividend growth funds like Vanguard Dividend Appreciation (VIG -4.2%).

With a 4.7% dividend yield, the Forbes Dividend Investor portfolio’s total return year-to-date is positive 1%, far better than the 14% decline suffered by the S&P 500 Index. Last week, however, only two of the portfolio stocks—Corterra Energy (CTRA +1.9%) and Altria Group (MO +0.9%)—posted gains. Fellow consumer staples like Kraft Heinz (KHC -0.1%) and Conagra Brands (CAG -1.4%) played good defense but still slipped in price.

Five New Dividend Buys With Limits

The stocks we hold to have more value than current prices reflect. They trade at discounts to multiple five-year average valuation measures that include price to sales (P/S), price to book value (P/BV), price to current year expected earnings (P/E), price to cash flow per share (P/CF), and enterprise value/Ebitda.

When making portfolio selections, we seek out superior rates of dividend growth and revenue growth, as well as for high yields and low payout ratios. Operating cash flow over the past 12 months must be positive, and sufficient to cover the dividend.

We are adding five stocks from to the portfolio, but we are being selective about the price we pay for them by using limit prices. They are considered buys only at or below their respective buy limit prices indicated in the portfolio.

Click here for instant access to the Forbes Dividend Investor model portfolio with five new buys in chemicals, mining, advertising, retail and REITs.

John Dobosz is editor of Forbes Dividend Investor, which provides a weekly portfolio of high-yielding, value-priced income stocks, REITs and MLPs, and Forbes Premium Income Report, which sends out options-selling trade recommendations on two dividend-paying stocks every Tuesday and Thursday.