Leggett & Platt (LEG): 44 Consecutive Years Of Dividend Increases And A 3.1% Yield by Simply Safe Dividends
With operations dating back to the 19th century and a 3.1% dividend yield, LEG is an interesting company for dividend investors to analyze.
Leggett & Platt was founded in 1883 and patented the first steel coil bedspring. Over 130 years later, the company has grown into a diversified manufacturer of a broad variety of engineered components and products (e.g. innersprings, recliner mechanisms, adjustable beds, steel wire, seat frames, carpet cushion, armrests, etc.) used in bedding, furniture, carpet, cars, planes, and more around the world.
By end market, 21% of Leggett & Platt’s 2014 revenue was bedding, 16% fabric / carpet cushion, 15% automotive, 15% steel wire, 11% furniture, 7% consumer products, 5% work furniture, 3% aerospace, 3% steel tubing, 2% machinery, and 2% commercial vehicle products.
Overall, LEG’s pegs its macro market exposure as follows: 55% consumer durables, 25% commercial / industrial, and 20% automotive.
By geography, approximately 69% of Leggett & Platt’s production was in the United States, 11% in Europe, 10% in China, 6% in Canada, and 4% in other countries.
After learning more about LEG and its industry, coming up with the competitive advantages that have driven the company’s outstanding long-term performance was still challenging. We believe that the company’s management team has done an excellent job managing the business, and it’s worth mentioning the incentive system in place.
Leggett & Platt’s management team receives bonus compensation that is based on incentives targeting annual return on capital employed, growth in margins, and achievement of a 3-year total shareholder return in the top third of the S&P 500. Insiders also own more than 10% of LEG’s outstanding shares, further aligning their capital allocation decisions with the best interest of the company’s shareholders. The company’s culture has certainly helped its longevity.
Back to LEG’s actual operations, its strongest advantages are its long-standing customer relationships and reputation for quality (LEG has been in the industry for over 100 years), its economies of scale as the largest player in the market (LEG is also vertically integrated), its focus on innovation to improve profits and growth, and its global distribution system.
Manufacturing components used in mattresses, furniture, cars, and other products is usually a tough business. Buyers are focused on keeping their costs low, and many components can easily become commoditized and purchased for less overseas.
Leggett & Platt’s entry into its key markets many decades ago helped it acquire number one or number two market share positions, which it has successfully maintained through innovation (LEG has issued over 1,300 patents) and conservative capital allocation. As the biggest player with vertically integrated operations (LEG owns its own steel rod mill and machinery), LEG is often one of the lowest cost providers of its products. It has also developed innovations to adjust to shifting market trends, including adjustable beds and a “Comfort Core” innerspring used in hybrid mattresses that replaces traditional foam cores and innersprings.
Beyond product innovation and cost efficient operations, Leggett & Platt has successfully expanded the scope of its business well beyond bedding components with the help of acquisitions. For example, LEG formed its Aerospace Products business unit with the acquisition of Wester Pneumatic Tube, a leading provider of integral components for critical aircraft systems, in January 2012. The company has also increased its focus on automotive markets (15% of sales), helping grow its global content per vehicle by 50% since 2009.
Through acquisitions, LEG has diversified its business into a number of niches that offer higher growth and profitability. In 1960, bedding components represented nearly 100% of LEG’s sales. In 2014, the company’s revenue from bedding was just 21% of sales, underscoring LEG’s expansion into adjacent markets over the last 50 years.
Finally, LEG’s markets are generally slow changing in nature. The problems solved by mattresses and furniture are timeless, and about two-thirds of bedding and furniture purchases are made to replace existing products. This is a mature market with low-single digit growth. The manufacturing processes and materials used to produce these goods are evolving (e.g. foam mattresses) but at a mild pace.
Leggett & Platt ultimately targets 4-5% annual revenue growth and consistent margin improvement driven by cost savings, new product development, and modest market growth.
Leggett & Platt’s Key Risks
Leggett & Platt’s business is sensitive to several macroeconomic factors that are beyond its control. Changes in raw material costs (steel) and consumer spending trends have materially impacted LEG’s sales and earnings in the past, and we expect them to remain important factors going forward over short-term periods.
The best time to buy macro-sensitive stocks is when demand is weak and sentiment around the business is overly pessimistic. This is not the case with LEG. Its operating margin reached its highest level since 1999 last quarter, and strong growth in automotive markets have helped fuel LEG’s sales growth over the last five years. Additionally, sales of existing homes have been very strong, generating decent demand for mattresses and furniture.
While these factors impact LEG’s business over the near term and seem to indicate lower timeliness for the stock today, they are less relevant to the company’s 10-year outlook.
Our primary concerns with LEG are its margins. As a component supplier to price-sensitive markets like furniture and automobiles, LEG’s customers are always looking to save costs. With the bulk of its production in the U.S., it’s hard to imagine LEG maintaining a cost advantage over international players with cheaper labor, resources, and currencies.
Many of Leggett & Platt’s customers could also be forced to relocate or outsource more of their furniture and mattress manufacturing overseas to remain competitive in an increasingly global economy. LEG doesn’t have nearly as large of a manufacturing footprint outside of the U.S., which represented about 70% of its capacity last year, and could gradually be left behind with underutilized factories.
LEG’s sprawling operations could eventually come back to hurt the company as well. LEG has 18 business units, which is a lot to manage and try to be great at. If the company loses focuses or has to reorganize, it could erode some of LEG’s advantages. However, its business diversification also protects it from missing out on consumer trends, such as the move to memory foam mattresses.
It’s also worth noting that LEG’s top 10 customers accounted for 27% of its sales – if a major customer decides to source its components somewhere else or fundamentally change a product, LEG could experience a near-term earnings hit.
Dividend Analysis: Leggett & Platt
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. LEG’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
We think Leggett & Platt’s dividend is reasonably safe and have assigned the company