Dividend Kings In Focus: Leggett & Platt

Leggett & Platt (LEG) recently increased its dividend for the 50th consecutive year. As a result, it has joined the exclusive list of Dividend Kings.

Leggett & Platt has a long history of steady growth, with regular dividend increases. The company struggles during recessions, but its competitive advantages allow it to recover quickly.

With a reasonable valuation, 4% dividend yield, and long-term growth potential, we currently rank Leggett & Platt stock as a buy.

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 & Platt reported its third-quarter earnings results on November 1. The company reported revenues of $1.3 billion for the quarter, which represents a 9% increase compared to the prior year’s quarter. Revenues were in line with the consensus estimate.

Earnings–per–share of $0.71 during the third quarter were slightly lower year-over-year. Earnings–per–share for the quarter missed the analyst consensus estimate by $0.06.

Management also updated and increased its revenue guidance for the current fiscal year, with the company forecasting revenues of $5.0 billion to $5.1 billion. Meanwhile, EPS guidance was lowered to a range of $2.70 to $2.80.

Growth Prospects

We expect Leggett & Platt to grow its earnings-per-share by 5% annually over the next five years.

Earnings growth can be produced from multiple sources, including organic revenue growth, acquisitions, and share repurchases.

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.

Source: Investor Presentation

Cost controls are another major aspect of the company’s earnings growth strategy. Leggett & Platt 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.

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.

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. The company saw another difficult year in 2020, due to the coronavirus pandemic. This demonstrates that Leggett & Platt is not a recession-resistant business.

That said, Leggett & Platt has come through previous recessions intact and recovered strongly in 2021.

Valuation & Expected Returns

Leggett & Platt has an impressive dividend history. The company has increased its dividend for 50 years. Shares currently yield 4%, an attractive yield given the S&P 500 Index yields just ~1.3% on average.

Leggett & Platt is expected to generate earnings-per-share of $2.75 for 2021. Based on a current stock price of ~$41, shares are presently trading at a price-to-earnings ratio of 15.1.

The company has generated steady growth over many years, with a strong position in its industry. We believe something closer to 16 times earnings is fair value for Leggett & Platt stock.

As such, expansion of the P/E multiple could boost annual returns by 1.2% per year over the next five years.

We also expect 5% annual EPS growth from Leggett & Platt. Lastly, the stock has a 4% dividend yield, leading to total expected returns of 10.2% per year over the next five years.

Final Thoughts

With a long history of dividend growth that recently eclipsed 50 years, Leggett & Platt is one of the top blue-chip stocks.

The company is highly profitable, with durable competitive advantages to fuel its long-term growth. We expect annual returns just above 10% per year, making the stock a buy.

Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

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