Dividend Aristocrats In Focus: Leggett & Platt

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Dividend Aristocrats In Focus: Leggett & Platt


Updated on February 23rd, 2022 by Kay Ng

Every year, we review all of the Dividend Aristocrats, a group of 66 companies in the S&P 500 Index with 25+ consecutive years of dividend increases. We feel each Dividend Aristocrat deserves an individual review each year because the Dividend Aristocrats are very unique within the broader stock market.

In order to raise dividends for at least 25 years in a row, a company must have a consistently profitable business model that can generate positive earnings and cash flow, even during economic downturns. This is no easy task, as recessions are bound to happen on occasion. But relatively few companies have the strength to continue raising dividends every year, regardless of the economic climate.

With this in mind, we created a list of all 66 Dividend Aristocrats, along with important financial metrics such as dividend yields and price-to-earnings ratios. You can download your copy of the Dividend Aristocrats list by clicking on the link below:

 

Leggett & Platt (LEG) might not be a household name, but it is likely that millions of consumers come in contact with one (or more) of the company’s products every day.

Leggett & Platt has also increased its dividend, which currently yields 4.6%, for 50 years in a row. LEG is also on the exclusive Dividend Kings list.

Leggett & Platt has a strong business model with durable competitive advantages, making it an attractive dividend growth stock. Moreover, the reasonable stock valuation improves our expected rate of return for this Dividend Aristocrat.

Business Overview

Leggett & Platt is a diversified manufacturing company. It was founded all the way back in 1883 when an inventor named J.P. Leggett created a bedspring that was superior to the existing products at that time.

Today, Leggett & Platt designs and manufactures a wide range of products, including bedding components, bedding industry machinery, steel wire, adjustable beds, carpet cushioning, and vehicle seat support systems. It designs and manufactures products found in many homes and automobiles. The company has a diversified business, both in terms of product mix and geographic split.

slide showing Leggett business segments and products in a November 2021 presentation

Source: Investor Presentation

Leggett & Platt reported its fourth quarter and full-year earnings results on February 7th. Quarterly revenue of $1.3 billion rose 13% year-over-year. Adjusted earnings-per-share of $0.77 fell 3% from the same quarter the previous year.

For 2021, LEG reported record revenue of $5.07 billion that increased by 19% from 2020. Organic sales increased 18% due to price hikes that added 13% to sales growth, volume growth of 4% from the recovery in COVID-19 impacts, and acquisitions (net of small divestitures) that added 1% to sales. Full-year adjusted EPS rose 29% to $2.78 partly due to the rebound from COVID-19 impacts.

Management also provided guidance for the current fiscal year, forecasting revenues of $5.3 billion to $5.6 billion, and EPS of $2.70 to $3.00. Based on the midpoint, this would represent a 2.5% increase versus 2021.

Growth Prospects

Growth at Leggett & Platt will rely on a multi-faceted approach, including acquisitions, share repurchases and efficiencies achieved through cost controls. Leggett & Platt has a long-held policy of acquiring smaller companies to expand its market dominance in existing categories, or to branch out into new areas.

An example of this bolt-on strategy was the $1.25 billion purchase of Elite Comfort Solutions. Elite Comfort Solutions’ foam bedding operations complement Leggett & Platt’s existing mattress capabilities and infrastructure. In 2021, LEG made three small acquisitions that expanded its capabilities in International Bedding, Aerospace, and Work Furniture.

Another key component of Leggett & Platt’s earnings growth strategy is cost controls. The company continuously evaluates its portfolio to ensure it is investing in the highest-growth opportunities, and it is not afraid to divest low-margin businesses with poor expected growth.

For low-growth or low-margin businesses, it either improves performance, or exits the category. The company also drives cost reductions across the business, including in selling, general, and administrative expenses, and distribution costs.

Leggett & Platt has been able to reach its long-term growth targets thanks in large part to its significant competitive advantages in the core industries in which it operates.

Still, growth has moved in fits and starts at times. From 2006 through 2013, effectively no growth in earnings-per-share occurred. Then from 2013 to 2016, earnings-per-share jumped 70%. More recently, revenue and earnings-per-share declined significantly in 2020 due to the coronavirus pandemic.

The company’s earnings more than recovered by 2021. Overall, we forecast 5% annual EPS growth over the next five years.

Competitive Advantages & Recession Performance

Leggett & Platt has established a wide economic “moat,” meaning it has several operational advantages, which keep competitors at bay. First, the company enjoys a leadership position in the industry, which allows for scale.

Leggett & Platt also benefits from operating in a fragmented industry, which makes it easier to establish a dominant position. In most of its product markets, there are few, or no, large competitors. And when a smaller competitor does achieve significant market share, Leggett & Platt can simply acquire them, as it did with Elite Comfort Solutions.

Leggett & Platt also has an extensive patent portfolio, which is critical in keeping competition at bay. The company has impressive intellectual property, consisting of approximately 1,500 patents issued and nearly 1,000 registered trademarks.

Together, these competitive advantages help Leggett & Platt maintain healthy margins and consistent profitability. That said, the company did not perform well during the Great Recession.

Earnings-per-share during the Great Recession are shown below:

This earnings volatility should not come as a surprise. As primarily a mattress and furniture products manufacturer, it relies on a healthy housing market for growth. The housing market collapsed during the Great Recession, which caused a significant decline in earnings-per-share in 2007.

Related: The Top 3 Furniture Stocks You Can Invest In Right Now

Leggett & Platt also depends on consumer confidence, as roughly two-thirds of furniture purchases in the United States are replacements of existing products. When the economy enters a downturn, consumer confidence typically declines.

It also took several years for Leggett & Platt to recover from the effects of the Great Recession. Earnings continued to rise after 2007, but earnings-per-share did not exceed 2006 levels until 2012. The company saw another difficult year in 2020, due to the coronavirus pandemic. This demonstrates that Leggett & Platt is not a recession-resistant business.

Fortunately, the company maintains a strong financial position, which allows it to remain profitable and continue increasing dividends each year, even during recessions. Leggett & Platt has a healthy balance sheet; it was able to extend its debt maturity profile by issuing 30-year notes at an interest rate of 3.5%. At the end of 2021, its total liquidity was $1.6 billion and its net debt was 2.29 times the trailing-12-month adjusted EBITDA.

Valuation & Expected Returns

As previously mentioned, LEG stock has an impressive dividend history. The company has increased its dividend for half a century. Leggett & Platt has historically generated plenty of cash flow to distribute significant cash to investors and invest in growth initiatives.

It also has a solid current dividend yield of 4.6%. This is more than triple the ~1.3% average yield of the broader S&P 500 Index.

Leggett & Platt is expected to generate earnings-per-share of $2.85 for 2022. Based on a current stock price of ~$36.50, shares are presently trading at a price-to-earnings ratio of ~12.8.

While the company has been a steady grower over many years, with a long dividend history, we believe something closer to 16 times earnings is fair value for LEG stock. As such, this could indicate the potential for a meaningful valuation tailwind over the intermediate-term, to the tune of 4.5% per year if the current P/E expands to 16.

If you combine the 5% expected EPS growth rate, 4.6% starting dividend yield, and 4.5% potential valuation tailwind, you come to an expected annualized total return of 13.1% over the next five years.

Final Thoughts

Leggett & Platt has utilized a proven growth strategy, that has been successful for over 130 years. The company is highly profitable and has a solid 4.6% dividend yield, which has grown for 50 years in a row.

LEG stock is attractive for investors interested in stable dividend growth stocks with above-market yields. LEG stock is a buy right now. However, investors should keep in mind that Leggett & Platt’s business is subject to economic cycles.

Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:

If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:

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