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Leggett & Platt (LEG) cut its dividend because of leverage, a tough economic climate, and a change in strategic priorities. It is the first Dividend King to do so in many years. The company previously lost its Dividend Aristocrat status because it was removed from the S&P 500 Index.

The company’s recent difficulties have caused the share price to fall precipitously to values seen during the Great Recession. Furthermore, the dividend yield rose to over 10%, a percentage typically associated with a distressed company. The share price fell as investors sold this dividend stock because of poor results and worries about a dividend cut. However, we do not expect another decrease in the foreseeable future.

Overview of Leggett & Platt 

Leggett & Platt (LEG) is a global company that manufactures home furnishings and engineered products. The firm was founded in 1883. Today, it operates through three business segments: Bedding Products, Specialized Products, and Furniture, Flooring, and Textile Products. It sells a wide assortment of products, including springs, rods, wire, foam, sewing and quilting machines, mattress packing, bedding, casters, backrests, chair frames, adjustable beds, mattress foundations, suspension systems, motors, and more.

Total revenue was $4,725 million in fiscal year 2023 and in the past twelve months.

Dividend Cut Announcement

After the market closed on Tuesday, April 30^th, Leggett & Platt (LEG) cut its dividend payout. The company’s quarterly dividend rate was $0.46 per share before the announcement. The dividend is now $0.05 per share, an 89.1% reduction. In the quarterly results, the CEO said,

“We are taking proactive steps to ensure the long-term success of our business and deliver sustainable returns for our shareholders. Our near- to mid-term strategic priorities include strengthening our balance sheet and liquidity, improving margins by optimizing operations and our general and administrative cost structure, and positioning the company for profitable growth opportunities.”

“Consistent with these priorities, we are reducing the dividend to free up capital to accelerate the deleveraging of our balance sheet and solidify our long-held financial strength. Over the longer term, we expect to grow our business both organically and through strategic acquisitions, while also returning cash to shareholders via a combination of dividends and share buybacks. We are confident that the actions we are taking will better position us for the future and enhance shareholder value.”

Effect of the Change

By implementing a nearly 90% dividend cut, Leggett & Platt (LEG) is clearly attempting to reduce its cash requirement to pay down debt and deleverage the balance sheet. Interestingly, net debt was lower at the end of 2023 than at the end of 2019. However, the leverage ratio was higher at 3.1X because of lower operating income. Also, free cash flow was lower, while the dividend distribution increased. That said, the primary effect seems to be freeing up cash flow for future strategic acquisitions.

As a result, Leggett & Platt (LEG) lost its 53-year dividend increase streak and is no longer a Dividend King. A company rarely drops off this list because of reducing or omitting the dividend. The last time a company was removed from the list was when Vectren and Connecticut Water Service were acquired.

Challenges

Leggett & Platt was experiencing lower revenue and earnings per share because of the challenging economic environment. The firm’s margins were also declining, impacting profitability. Next, the leverage ratio was rising, and interest coverage was falling.

Source: Portfolio Insight

Source: Portfolio Insight

Higher Leverage

Interestingly, Leggett & Platt’s total long-term debt was decreasing. At the end of 2019, it was $2,063 million, but by the end of 2023, it had declined to $1,677 million. Its cash position was also about $100 million higher. However, the leverage ratio still rose to ~3.1X from 2.8X because earnings before interest, taxes, depreciation, and appreciation (EBITDA) were lower. Conversely, interest coverage fell from ~5.4X to ~3.7X.

Despite the company stating they desired to accelerate deleveraging the balance sheet, it was not a significant problem relative to other companies slashing their dividends. In fact, Leggett & Platt still had a BBB/Baa1 lower-medium investment grade credit rating.

Tough Economic Climate

Perhaps the most significant challenge was the harsh economic climate. Leggett & Platt’s revenue and earnings per share were falling in tandem. Because of high interest rates, house and, thus, furnishings sales were probably lower. Similarly, automotive sales are still lower than before the pandemic because of supply chain and affordability issues.

Restructuring and Future Acquisitions

Based on the statement in the first quarter earnings release, Leggett & Platt is obviously attempting to restructure and position itself for future growth. The company will likely sell unprofitable businesses and strengthen existing ones through future acquisitions. By cutting the dividend by almost 90%, it will free up around $200 million in free cash flow (FCF) for this endeavor.

Dividend Safety

Leggett & Platt’s dividend safety was weaker than average before the announcement. The engineering products manufacturer receives a dividend quality grade of ‘C+’ from Portfolio Insight. Hence, it is the 60^thpercentile of dividend stocks tracked. Moreover, as seen on the chart below from Portfolio Insight*, the dividend yield had soared to 10%+ before the cut. Percentages at this level are typically indicative of a distressed company.

After lowering the dividend by nearly 90%, the calculated dividend yield is around 1.3%. The quarterly rate is $0.06 per share. The forward dividend yield is unexpectedly lower than the S&P 500 Index’s average.

The annual dividend now requires about $32.16 million ($0.24 yearly dividend x 134 million shares), compared to $239.4 million in 2023. In addition, based on consensus 2024 estimates, the dividend payout ratio will shrink from 131% to approximately 21%. We expect the annual difference to be used to deleverage and eventually pursue M&A.

The dividend is clearly in a better position now, and we do not expect Leggett & Platt (LEG) to conduct another cut soon.

Source: Portfolio Insight*

Final Thoughts on the Leggett & Platt (LEG) Dividend Cut

Leggett & Platt’s dividend has faced risks for the past few years because of a challenging economic climate. Consequently, revenue and EPS were falling. That said, the company could afford the dividend based on FCF in 2023. However, projected 2024 earnings did not cover the previous dividend rate. Moreover, it seems like management has different priorities than the dividend. Hence, Leggett & Platt (LEG) cut its dividend losing Dividend King status.

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