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Dividend Aristocrats In Focus Part 21: Leggett & Platt, Inc. (LEG)

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Leggett & Platt (LEG) has one of the longest company histories among the Dividend Aristocrats. It 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.

J.P. Leggett’s invention was so revolutionary that it launched not just his own company, but an entire industry as well. Today, Leggett & Platt has 17 business units, 20,000 employees, and 130 manufacturing facilities across 19 countries.

Leggett & Platt is one of only 50 Dividend Aristocrat (see the full list here). It has increased its dividend for 45 years in a row.

Keep reading this article to learn more about the investment prospects of Leggett & Platt.

Leggett & Platt – Business Overview

Any company that has been in business for more than 130 years will encounter many changes through the decades, and Leggett & Platt is no exception. It has diversified into a much broader set of products.

For example, in 1960, bedding components represented nearly 100% of its sales. Bedding components and products are still its single largest source of revenue, but the Bedding Group segment comprises less than 25% of total sales.

Leggett & Platt operates in four main segments:

  • Residential Furnishings (51% of annual sales)
  • Specialized Products (26% of annual sales)
  • Commercial Products (15% of annual sales)
  • Industrial Materials (8% of annual sales)

Growth Prospects

Over the past 10 years, Leggett & Platt grew earnings-per-share by ~4% compounded annually. Its steady growth is impressive, given it struggled during the Great Recession of 2008-2009. Leggett & Platt has benefited from the economic recovery in the U.S. and the strength of the housing market.

Last year was a particularly good year for the company. LEG’s earnings-per-share (adjusted for divestitures and one-time financial items) increased 31% from 2014.

Through the first three quarters of this year, total sales dropped 4% versus the same nine-month period last year. However, this was mostly due to divestitures. Earnings-per-share increased 19% through the first three quarters of 2016. The company benefited from lower raw materials costs, as the price of steel has dropped this year.

These benefits are expected to continue. For the full year, management expects record earnings-per-share from continuing operations.

Going forward, Leggett & Platt has a plan to increase earnings-per-share by 10% per year by 2019. This will be accomplished through a variety of initiatives.

Source: Sep. 2016 Company Update Presentation, page 19

Leggett & Platt forecasts 7% annualized sales growth through 2019.

The company plans to increase sales by organic growth and acquisitions. Organic unit volumes are projected to increase 4%-5% this year, due to continued economic recovery and strength in the housing market. Sales should also increase from bolt-on acquisitions. Over the past three years, acquisitions have on average added 3% growth to Leggett & Platt each year.

Competitive Advantages & Recession Performance

One competitive advantage for LEG is its size, which gives it economies of scale. It is difficult for small competitors to enter this business, since manufacturing and transportation costs for mattresses and other home furnishings is high.

In addition, Leggett & Platt has a majority of its manufacturing locations close to its product end users. In fact, 62% of its manufacturing locations are in the U.S. This allows the company to keep transportation and other expenses under control.

Leggett & Platt, Inc. (LEG)

Source: 2015 Annual Report, page 19

Because of its large operational footprint, Leggett & Platt can minimize costs. Last year, the company generated a 270 basis-point expansion of gross profit margin.

Another competitive advantage for Leggett & Platt is its product development and innovation. As of the end of last year, LEG has been issued 1,367 patents, with another 596 patents in process.

Such a strong patent portfolio helps the company maintain a competitive edge and keep margins high.

Lastly, Leggett & Platt credits its growth over the past 133 years to it long-term customer relationships. The company prides itself on taking the time to gain a deep understanding of customer designs and needs. This has resulted in customer loyalty over time.

As one might expect, Leggett & Platt did not perform well during the Great Recession. LEG is sensitive to economic fluctuations. As a mattress and furniture manufacturer, it is also reliant on a healthy housing market. The economy, and in particular the housing market, took a deep dive during the recession of 2008 and 2009.

Not surprisingly, Leggett & Platt is not a recession-resistant business. Its earnings-per-share from 2006 to 2010 are shown below to emphasize the long-lasting impact of the recession:

  • 2006 earnings-per-share of $1.57
  • 2007 earnings-per-share of $0.28
  • 2008 earnings-per-share of $0.73
  • 2009 earnings-per-share of $0.74
  • 2010 earnings-per-share of $1.15

Not only did earnings-per-share fall significantly during the recession, but it took years for LEG to recover what it had lost. Earnings-per-share did not exceed 2006 levels until 2012.

Leggett & Platt maintained a payout ratio above 100% from 2007 through 2009.  To the company’s credit, it was able to keep its dividend intact during the recession, and thus held onto its status as a Dividend Aristocrat. However, investors should be mindful that if another deep, protracted recession occurs, there is a distinct possibility the company may cut its dividend.

Valuation & Expected Total Returns

Leggett & Platt stock trades for a price-to-earnings ratio of 17.1. The stock appears undervalued, as it is cheaper than the S&P 500 and the company’s own historical average.

The S&P 500 has a price-to-earnings ratio of 24.5. And, since 2000, LEG stock has traded for an average price-to-earnings ratio of 18.

Leggett & Platt’s total return potential going forward will be composed of earnings growth and dividends. Assuming 10% earnings growth over the next several years, which would be in line with management’s expectations, would yield satisfactory returns.

In addition, the stock has a $1.36 per share annual dividend. The current dividend yield is 3.1%.

With that in mind, overall shareholder returns could be as follows:

  • 8%-10% earnings-per-share growth
  • ~3% dividend yield

This would result in 11%-13% annual returns for shareholders moving forward, before possible valuation multiple gains.

Final Thoughts

Leggett & Platt has a long and successful history. It has rewarded shareholders with dividend hikes for more than four decades.

The stock has an above-average dividend yield and compelling growth prospects. While Leggett & Platt stock may not be a good stock to own when the next recession hits, it is a solid dividend growth stock.

Article by Bob Ciura

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