Updated on January 30th, 2019 by Bob Ciura
Every year, we review all of the Dividend Aristocrats, a group of 57 companies in the S&P 500 Index with 25+ consecutive years of dividend increases.
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 for 47 years in a row. Leggett & Platt has a secure dividend, with the stock currently yielding 3.8%. The company’s dividend is very safe. You can watch the following video for a detailed discussion of Leggett & Platt’s dividend safety:
Keep reading this article to learn more about Leggett & Platt’s business model and investment thesis.
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
In late October (10/25/18) Leggett & Platt reported third-quarter sales of $1.1 billion, up 8% from the same quarter last year. Organic revenue increased 6%, including 2% volume growth, indicating strong demand for Leggett & Platt’s products. The company noted growth across multiple product categories, including U.S. Spring, Automotive, Adjustable Bed, Aerospace, Steel Rod, and Work Furniture. Acquisitions, net of divestitures, contributed an additional 2% to quarterly sales growth.
Leggett & Platt generated earnings-per-share of $0.67 for the quarter, up 10% year-over-year. Sales growth was the primary reason for the double-digit earnings growth last quarter, along with higher profit margins in the Steel Rod businesses. Tax reform and share repurchases also helped boost earnings, partially offset by higher raw materials and transportation costs.
Leggett & Platt later released an update for an expected fourth-quarter charge of approximately $16 million pre-tax, approximately half of which is non-cash. The charge pertains to the company’s Fashion Bed and Home Furniture segments, and is related to a restructuring of these operations. The charge will reduce GAAP earnings-per-share by $0.19 for the fourth quarter, although adjusted results are expected to remain unaffected.
We maintain a positive long-term growth outlook for Leggett & Platt.
Leggett & Platt aims for at least 6% annual revenue growth. To reach its goal, the company will utilize a multi-faceted approach. First, acquisitions will help boost growth. 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.
Leggett & Platt continues to pursue bolt-on acquisitions, such as the recent $1.25 billion purchase of Elite Comfort Solutions.
Source: Investor Presentation
The acquisition of Elite Comfort Solutions will significantly expand Leggett & Platt’s exposure to specialty foam and other hybrid bed products. Elite Comfort Solutions generated $611 million in sales last year. And, it has EBITDA margins above that of Leggett & Platt, so the acquisition is expected to be accretive to earnings starting in 2020.
Share repurchases will also help maintain earnings growth. At quarter-end, Leggett & Platt had 130.4 million shares outstanding, a 1.1% reduction over the last 12 months.
Another key component of Leggett & Platt’s earnings growth strategy is cost controls. It 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.
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. Globally, Leggett & Platt has 17 business units, with 130 manufacturing facilities across 19 countries.
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. 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. The company had a debt-to-EBITDA ratio of 2.3x at the end of last quarter, along with a net-debt-to-capital ratio below 40%.
Valuation & Expected Returns
Using the midpoint of management guidance, Leggett & Platt is expected to generate earnings-per-share of $2.45 for 2018. Based on this, the stock trades for a price-to-earnings ratio of 16.4, compared with our fair value estimate of 18.0.
We believe a higher stock valuation is warranted, due to the company’s steady growth over many years, and long dividend history. Leggett & Platt also has positive earnings growth expectations going forward. Expansion of the stock valuation multiple could boost annual returns by 1.9% through 2024.
Combining valuation changes with 6.0% expected annual earnings growth and the 3.8% dividend yield, we expect total returns of nearly 12% per year for Leggett & Platt stock over the next five years. This is a strong rate of return for a blue-chip company.
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% dividend yield.
With an operating history of more than 100+ years, a 3%+ dividend yield, and dividend increases for 47 years in a row, 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.
As a result, Leggett & Platt is an attractive stock for investors interested in stable dividend growth stocks.