Investors seeking stable dividend stocks amidst economic uncertainties often look for companies with high dividend yields. However, simply relying on dividend yield can be misleading as it may not always correlate with strong share price performance. In this context, we compare two Dow Jones Industrial Average ($DOWI) components – industrial conglomerate 3M (NYSE:MMM) and pharmaceutical company Merck (NYSE:MRK) – to identify which stock holds better upside potential for investors in the current market environment.

Business Profiles 

Merck (NYSE:MRK), a pharmaceutical giant established in 1891, boasts a market cap of $267.14 billion. With operations in 66 countries and a ranking of 71st on the Fortune 500 list, the New Jersey-based company focuses on the healthcare, life sciences, and electronics sectors.

On the other hand, 3M (NYSE:MMM), founded in 1902, is a conglomerate with a market cap of $61.03 billion. Operating in more than 70 countries, 3M specializes in industrial safety, healthcare, and consumer goods. The company has an impressive track record of over 100,000 patents for its innovations.

Financials

Merck’s (NYSE:MRK) Q2 report showed a 3% yearly rise in sales to $15 billion, surpassing the consensus estimate of $14.45 billion. Although the company reported a net loss of $2.06 per share due to a $10.2 billion charge related to the acquisition of Prometheus Biosciences, the loss was narrower than analysts’ expectations of $2.17 per share. Merck consistently outperforms analysts’ quarterly earnings estimates.

3M’s (NYSE:MMM) second-quarter results were softer compared to the previous year. The company reported net sales of $8.3 billion, down 4.3% from the prior year, and EPS of $2.17, a 47.6% decline from the previous year. Despite these declines, both top- and bottom-line results exceeded consensus estimates. In fact, 3M’s EPS has consistently beaten analysts’ expectations in 4 out of the past 5 quarters.

Share Price Performance

Both Merck and 3M had disappointing performances in 2023, contrary to the broader stock market’s positive trend. While the Dow Jones Industrial Average showed a 7% increase year-to-date, both Merck and 3M experienced negative returns.

However, 3M stock underperformed Merck stock, with a 9.2% decline in 2023 and a 28.6% drop from its 52-week high of $152.30. On the other hand, Merck was down only 2.8% year-to-date and about 11% away from its 52-week high of $119.65.

Valuation

 In terms of relative valuation, 3M appears more attractive than Merck based on several key metrics. 3M’s price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF) ratios are lower than those of Merck. However, Merck has a lower price-to-book (P/B) ratio compared to 3M.

Analyst Estimates

Analysts are more optimistic about Merck’s prospects than 3M. The consensus rating for Merck is Strong Buy, with a mean target price of $124.44, indicating a potential upside of approximately 15.4% from current levels. Out of 16 analysts covering Merck, 13 have a Strong Buy rating.

On the other hand, analysts assign a consensus Hold rating to 3M, with a mean target price of $114.54, implying an expected upside of less than 6%. Out of 14 analysts covering 3M, only one has a Strong Buy rating, while 10 have a Hold rating, and three rate it as a Strong Sell.

Dividend Yield

Regarding dividend yield, 3M outperforms Merck. 3M’s dividend yield is 5.36%, higher than Merck’s 2.75%. Looking ahead, 3M also has a higher forward dividend yield of 5.38% compared to Merck’s 2.74%.

Conclusion

Both 3M and Merck present potential value for investors due to their solid fundamentals and long-standing track records of dividend payouts. Value-minded investors may be attracted to 3M’s higher dividend yield and lower relative valuations. However, considering Merck’s stronger price action, favorable analyst ratings, competitive dividend payouts, and fair valuations, MRK seems to hold the edge in this Dow dividend stock face-off at current levels.

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