Published by Bob Ciura on October 24th, 2017
Every year, we review each of the 51 Dividend Aristocrats. The Dividend Aristocrats are a group of 51 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
The next Dividend Aristocrat to be reviewed is diversified manufacturer Leggett & Platt (LEG).
Leggett & Platt 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.
And, Leggett & Platt has increased its dividend for 46 years in a row.
With another four years of dividend increases, Leggett & Platt will become a Dividend King, a group of just 22 stocks with 50+ years of consecutive dividend increases. You can see all 22 Dividend Kings here.
Leggett & Platt has a secure 3% dividend yield, and is very likely to become a Dividend King.
Leggett & Platt has been in business since 1883, when J.P. Leggett, an inventor, created a bedspring that was superior to the existing products at that time.
Today, Leggett & Platt designs and manufactures products found in most homes and automobiles. The company has 17 business units, 20,000 employees, and 130 manufacturing facilities, across 19 countries.
Leggett & Platt manufactures a wide range of products, including bedding components, bedding industry machinery, steel wire, adjustable beds, carpet cushioning, and vehicle seat support systems.
Source: September 2017 Investor Presentation, page 4
2016 was a very good year for the company. Sales declined 4% for the year, but this was due to divestitures and unfavorable currency translations.
However, operating earnings-per-share increased 15%, and reached a company record. Earnings growth was due to margin improvements and share repurchases.
Leggett & Platt has a multi-faceted growth strategy.
First, the company seeks growth through targeted acquisitions of smaller competitors, in existing or new categories. It acquires companies in the U.S. and abroad, to expand its international exposure.
Acquisitions in 2016 include three small buyouts, for an aggregate purchase price of roughly $30 million. The businesses acquired included a U.S. manufacturer of aerospace tube assemblies, a distributor of geosynthetic products, and a South African producer of mattress innersprings.
The company also acquired the remaining interest in an automotive joint venture in China, for $35 million.
Judging by the company’s financial results, it is clear the strategy is working well. Leggett & Platt has generated steady sales and earnings growth for many years.
Source: September 2017 Investor Presentation, page 43
It has performed particularly well in the years following the Great Recession.
Leggett & Platt also generates earnings growth, through cost cuts. It continuously evaluates its portfolio to ensure it is investing in the highest-growth opportunities. 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.
Source: September 2017 Investor Presentation, page 45
With the exception of the industrial segment, margins have held steady or significant improved in the past several years.
For 2017, Leggett & Platt expects total sales of $3.9 billion to $4.0 billion, which would represent 4%-7% growth from last year. Operating earnings-per-share are expected in a range of $2.40 to $2.50 for 2017.
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 126 manufacturing facilities, 77 of which are located in the U.S., along with 49 in 18 foreign countries.
Separately, Leggett & Platt benefits from a fragmented industry. In most of its product markets, there are few, or no, large competitors.
Leggett & Platt also has an extensive patent portfolio, which is critical in keeping competition at bay. Fortunately, Leggett & Platt has impressive intellectual property, consisting of 1,500 patents issued and 991 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)
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.
It also took several years for Leggett & Platt to recover. 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.
Valuation & Expected Returns
Leggett & Platt stock trades for a price-to-earnings ratio of 19, based on trailing earnings. This is a slightly below-average multiple; the S&P 500 Index has an average price-to-earnings ratio of 25.
This means Leggett & Platt is valued at a discount of approximately 24%. With a price-to-earnings ratio near 20, Leggett & Platt does not seem to be significantly undervalued. However, it does not seem overvalued either, given its strong growth and high-quality business.
As a result, it seems appropriate to label Leggett & Platt as fairly valued. This means investors should not expect continued expansion of the price-to-earnings multiple, as a source of future return.
Future returns will be comprised mainly of earnings growth and dividends.
Leggett & Platt’s internal forecast is for 11%-14% total shareholder return each year, driven by 6%-9% organic revenue growth, 1% margin expansion, a 3% dividend yield, and a 1% boost from share repurchases.
Cash returns are an important driver of shareholder returns. Leggett & Platt is committed to returning excess cash flow, through share repurchases and dividends.
Source: September 2017 Investor Presentation, page 46
However, it may be prudent to expect slightly lower revenue growth. Leggett & Platt’s sales growth has not reached 7% since 2014.
If sales growth expectations are lowered to 4%-6%, which is more in-line with actual growth in recent years, Leggett & Platt’s total returns would be as follows:
- 4%-6% revenue growth
- 1% margin expansion
- 3% dividend yield
- 1% share repurchases
In this forecast, total annual returns would reach 9%-11%, which is still a satisfactory rate of return.
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 and a 3%+ dividend yield, Leggett & Platt has earned a place on our list of “blue-chip” stocks. You can see the full list of over 50 blue-chip stocks here.
Leggett & Platt is not a very cheap stock at the moment, but for investors interested in stable dividend growth stocks, it is worthy of further consideration.