Updated on February 25th, 2021 by Bob Ciura
Every year, we review all of the Dividend Aristocrats, a group of 65 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 65 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 3.6% – for 49 years in a row. Leggett & Platt has a strong business model with durable competitive advantages, making it an attractive dividend growth stock. However, the high stock valuation meaningfully reduces our expected rate of return for this Dividend Aristocrat.
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.
Source: Investor Presentation
Leggett & Platt reported its fourth-quarter and full-year earnings results on February 8th. Quarterly revenue of $1.2 billion rose 4% year-over-year, and exceeded analyst estimates. Earnings-per-share of $0.76 increased 19% from the same quarter the previous year.
For 2020, revenue of $4.28 billion declined 10% from 2019. Organic sales were down 11% due to a 10% decline in volume, only partially offset by a 1% positive boost from acquisitions. Full-year earnings-per-share declined 17% to $2.13.
Management also provided guidance for the current fiscal year, forecasting revenues of $4.6 billion to $4.9 billion, and earnings-per-share of $2.30 to $2.60. This would represent a meaningful improvement versus 2020, although the midpoint of 2021 EPS guidance would still fall below 2019 EPS levels.
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.
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 last year due to the coronavirus pandemic.
The company performed much better in the 2020 fourth quarter, instilling some confidence that the worst is behind Leggett & Platt assuming the global economy continues to recover in 2021. Overall we are forecasting 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. Leggett & Platt 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:
- 2006 earnings-per-share of $1.57
- 2007 earnings-per-share of $0.28 (-82% decline)
- 2008 earnings-per-share of $0.73 (161% increase)
- 2009 earnings-per-share of $0.74 (1% increase)
- 2010 earnings-per-share of $1.15 (55% increase)
This earnings volatility should not come as a surprise. As primarily a mattress and furniture products manufacturer, it is reliant 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.
Leggett & Platt is also reliant 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, with no commercial paper outstanding and no significant debt maturities until August 2022.
Valuation & Expected Returns
As previously mentioned, Leggett & Platt has an impressive dividend history. The company has increased its dividend for nearly 50 years. The company has paid a flat dividend for 8 consecutive quarters, putting its Dividend Aristocrat eligibility in jeopardy if it does not increase the dividend for 2021.
Leggett & Platt has historically generated plenty of cash flow to distribute significant cash to investors, and invest in growth initiatives.
Source: Investor Presentation
It also has a solid current dividend yield of 3.6%. This is more than double the ~1.5% average yield of the broader S&P 500 Index.
Leggett & Platt is expected to generate earnings-per-share of $2.45 for 2021. Based on a current stock price of ~$44, shares are presently trading at a price-to-earnings ratio of 17.8.
While the company has been a steady grower over many years, with a long dividend history, we believe something closer to 15 times earnings is fair value for Leggett & Platt stock. As such, this could indicate the potential for a meaningful valuation headwind over the intermediate-term, to the tune of -3.4% per year if the current P/E declines to 15.
If you combine the 5% expected EPS growth rate, 3.6% starting dividend yield and -3.4% potential valuation headwind, you come to an expected annualized total return of 5.2% over the next five years.
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 3.6% dividend yield, which has grown for 49 years in a row. Further, Leggett & Platt has also earned a place on our list of “blue-chip” stocks. You can see the full list of blue-chip stocks here.
With that said, Leggett & Platt’s valuation is high, given its challenged business fundamentals. It is possible that shares could see a reduction in the P/E multiple from the current level, which would considerably reduce future shareholder returns.
Leggett & Platt is an attractive stock for investors interested in stable dividend growth stocks with above-market yields. However, we believe that the current valuation is too high to buy the stock at the current valuation level. Leggett & Platt stock remains a hold right now.