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, and new competitive and technological threats can appear. Given this, relatively few companies have the strength to continue raising dividends every year, regardless of the economic climate.

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 4.5%, for 51 years in a row. That means the company is also on the ultra-exclusive Dividend Kings list, which requires 50 consecutive years of dividend increases.

Leggett & Platt has a strong business model with durable competitive advantages, making it an attractive dividend growth stock. Moreover, the reasonable stock valuation improves our expected rate of return for this Dividend Aristocrat.

Business Overview

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 reported second-quarter earnings on August 2nd, 2022, and results were a record on the top line. Total revenue came to $1.33 billion, up 5% year-over-year, and meeting estimates. Earnings-per-share came to 70 cents, which was down from 79 cents but was one penny ahead of expectations.

The company noted organic sales were up 5%, as volume was down 6% from softness in residential end market demand, which was partially offset by growth in industrial and automotive end markets. Raw material inflation-related price increases added 13% to revenue, more than offsetting the volume decline. Currency translation was a 2% headwind during the quarter as the US dollar strengthened further.

Second-quarter EBIT was $143 million, essentially flat on an adjusted basis year-over-year.

The company lowered guidance for the year to sales of $5.2 billion to $5.4 billion and earnings-per-share of $2.65 to $2.80. We lowered our estimate accordingly, to the midpoint at $2.73.

Growth Prospects

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. In 2021, LEG made three small acquisitions that expanded its capabilities in International Bedding, Aerospace and Work Furniture.

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, 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 in 2020 due to the coronavirus pandemic.

The company’s earnings more than recovered by 2021. Overall, we forecast 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 an edge on the competition. The company 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 given its exposure to discretionary end markets, such as furniture and auto production.

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 relies 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 also depends 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; it was able to extend its debt maturity profile by issuing 30-year notes at an interest rate of 3.5%.

Valuation & Expected Returns

As previously mentioned, Leggett has an impressive dividend history. The company has increased its dividend for half a century. Leggett & Platt historically generated plenty of cash flow to distribute significant cash to investors and invest in growth initiatives.

It also has a solid current dividend yield of 4.5%. This is right at triple the yield of the broad S&P 500 Index.

Leggett & Platt is expected to generate earnings-per-share of $2.73 for 2022. Based on a recent stock price of $38.74, shares are presently trading at a price-to-earnings ratio of 14.2.

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 the stock. As such, this could indicate the potential for a small valuation tailwind over the intermediate term of about 1% annually.

If you combine the 5% expected EPS growth rate, 4.5% starting dividend yield, and ~1% potential valuation tailwind, you come to an expected annualized total return of 9.9% over the next five years. That’s good enough for a buy rating given the company’s exemplary dividend longevity.

Final Thoughts

Leggett & Platt has utilized a proven growth strategy, that has been successful for more than 130 years. The company is highly profitable and has a very strong 4.5% dividend yield, which has grown for 51 years in a row.

Leggett stock is attractive for investors interested in stable dividend growth stocks with above-market yields, and we rate it a buy. However, investors should keep in mind that Leggett & Platt’s business is subject to economic downturns given its end markets are somewhat discretionary.

More By This Author:

Will Alibaba Ever Pay A Dividend?
Dividend Aristocrats In Focus: Coca-Cola
3 Oil Refiners To Hold For Dividends