It looks like the S&P 500 Index downturn may have ended. The market declined (-14.6%) from the high of January 4^th to the low on February 24^th. This drop was an opportunity for investors to buy high-quality companies. Since then, the market has increased by ~12.5%. So overall, the market is down about 6% from its all-time high. However, there are still companies that have not had a 6%+ run-up. For example, Leggett & Platt Inc. (LEG), a Dividend King has been falling these past few weeks while the stock market has increased. However, I see this as an opportunity to continue buying LEG shares.

Overview of Leggett & Platt (KEG) – A High-Yield Dividend King

Leggett & Platt Inc was founded in 1883. Today, the company designs and produces engineered components and products found in most homes and automobiles. It operates its business through three segments: Bedding Products, Specialized Products, Furniture, Flooring, and Textile Products. The company serves a broad suite of customers around the world. Its products include bedding components, automotive seat support and lumbar systems, specialty bedding foam and private label finished mattresses, home furniture and work furniture components, flooring underlayment, adjustable beds, and various other products.

Source: Leggett & Platt Investor Relations

Total revenue was $5,072.6 million in 2021 and the past 12 months. Roughly 50% of net sales are from bedding, 17% of sales are from flooring and textiles, 16% of sales are from automotive, and 8% of sales come from home furniture.

Source: Leggett & Platt Investor Relations

LEG Dividend History, Growth, Yield, and Safety

LEG was down 40% since its all-time high in May 2017. Furthermore, the stock was one of the worst performing Dividend Kings in 2021. The main driver of the price decrease has been overvaluation and suffering from inflationary headwinds. The current stock price of $35.53 is right at the lower end of the 52-week range, between $34.77 and $59.16 per share. Thus, LEG looks like a stock that seems to be in the right place to buy up shares. 

We will now look at LEG’s dividend history, growth, yield, and safety. We will then determine if it’s still a good buy at current prices.

Dividend History and Growth

LEG is a Dividend King, a company that has increased its dividend for more than fifty years. In this case, LEG had increased its dividend for 51 consecutive years. LEG’s most recent dividend increase was 5.0%, announced in February 2022. Additionally, according to Portfolio Insight*, LEG has a five-year dividend growth rate of 4.38% and a 4.25% growth rate in the past decade, which is low considering how fast inflation increased last year.

Source: Portfolio Insight*

Something essential to note is that LEG continued to pay its dividend during the most challenging period in the last 100 years. Most businesses and industries were cutting or suspending their dividends payments during the COVID-19 pandemic; LEG, however, continued to pay out its dividend and increased it. That is very noteworthy. This fact alone leads me to believe in the strength of the company and the fact that management is focused and committed to the dividend policy.

Dividend Yield

The company has an excellent dividend yield of 4.73% as of this writing, which is more than three times the current dividend yield of the S&P 500 Index. This dividend yield is a respectable initial yield for those income-driven investors. This dividend yield is also really good for investors leaving the bond market looking for higher yields. Also, this is an excellent stock for income-driven investors who may want a 4.5% yield or more. LEG is just above that marker; in 1 to 2 years, I am sure that the yield on cost would be much higher than 5.0%.

Source: Portfolio Insight*

LEG’s current dividend yield is higher than its own 5-year average dividend yield of 3.66%. I like to look at this metric because it gives me a good idea if a company I am researching is undervalued or overvalued based on the current and 5-year average yield. This fact is because stock price and yield correlate with one another. If the stock price goes higher, then the dividend yield goes lower and vice versa.

Dividend Safety

Let’s determine if the current dividend is safe? Dividend safety is a critical metric for a dividend growth investor. Sometimes, undervalued dividend stocks can present us with a “value trap,” and the stock price can continue to head lower.

To determine if the dividend payments are safe every year. First, we must look at two critical metrics. The first one is earning-per-share (EPS), and then we must examine free cash flow (FCF) per share or operating cash flow (OCF).

Analysts predict that LEG will earn an EPS of $2.83 per share for FY 2022. Analysts are very accurate when predicting LEG futures EPS. In addition, the company is expected to pay out $1.73 per share in dividends for the entire year. These numbers give us a payout ratio of around 61% based on EPS. Having a 50% or lower dividend coverage with a dividend yield of over 3.0% gets me very excited. However, having a dividend yield of almost 5% with a 60% payout ratio does give me that same excitement. This percentage will allow the company to continue to grow its dividend at a mid-single-digit rate or a low-single-digit rate, as has it has been doing for the past ten years. In addition, LEG has a dividend payout ratio of 39.6% on an operating cash flow basis. Thus, the dividend is well covered in both EPS and OFC.

Risks for Leggett & Platt

As with all investment ideas, there are always risks. LEG’s most significant risk is the company faces is China exposure, which makes up about 11% of 2021 revenues. In addition, during a recession, the company does not perform very well. For example, in the Great Recession of 2007 – 2009, the company earnings dropped 23% in 2007 and 27% in 2008. Finally, in 2009, it stabilized with just a 2% decrease. In addition, the dividend payout ratio was over 100% for two years. As a result, there was a significant risk of a dividend cut. However, the company maintained and increased the dividend during those years.

Competitive Advantage

LEG’s competitive advantage comes from its size and history of doing business. As a result, the company can optimize and scale much faster than most competitors. The company also could continue to make strategic acquisitions to grow its size helping with future earnings growth.

LEG’s Revenue and Earnings Growth / Balance Sheet Strength

We will now look at how well LEG performed and grew its EPS and revenue throughout the years. When valuing a company, these two metrics are at the top of my list to study. Without revenue growth, a company can’t have sustainable EPS growth and continue paying a growing dividend.

LEG revenues have been growing modestly at a compound annual growth rate (CAGR) of 3.5% for the past ten years. Net income, however, did a little better with a CAGR of 5.4% over the same ten-year period. 

However, EPS has seen a much better growth rate than revenue and net income. EPS has grown 9.8% annually for the past ten years. And over the past five years, EPS had a CAGR of 3.1%. The EPS had a significant decrease from FY2019 to FY2020, with a decline of 17% year over a year caused by the COVID-19 pandemic.

Also, since revenue, net income, and EPS did have decent growth over the years, what makes this stock attractive is its valuation and dividend yield. We will talk about the company valuation and dividend yield later in this article. In the meantime, analysts predict that the company will grow EPS at a 6% rate over the next five years. 

Last year’s EPS increased from $2.13 per share in 2020 to $2.78 per share for 2021, a significant increase of 31%. Considering the challenging two years because of the COVID-19 pandemic, this growth was excellent. Also, analysts expect LEG to make an EPS of $2.83 per share for 2022, which would be a 2% increase compared to 2021. 

In addition, the company has a solid balance sheet. Currently, LEG has an S&P Global credit rating of BBB, a lower-medium investment-grade credit rating. Also, the company has a debt-to-equity ratio of 1.4, which is an acceptable ratio. Thus, the company has a stable balance sheet to overcome significant economic downturns like the COVID-19 pandemic last two years.

LEG Valuation

One of the valuation metrics that I like to look for is the dividend yield compared to the past few years’ histories. I also want to look for a lower price-to-earnings (P/E) ratio based on the past 5-year or 10-year average. Furthermore, I like to use the Dividend Discount Model (DDM). I use a DDM analysis because a business is ultimately equal to the sum of the future cash flow that that business can provide. 

Let’s first look at the P/E ratio. LEG has a P/E ratio of 12.6X based on FY 2022 EPS of $2.83 per share. The P/E multiple is excellent compared to the past 5-year P/E ratio average of 19.4X. If LEG’s valuation were to revert to a P/E ratio of 19.4X, we would obtain a price of $54.90 per share.

Now let’s look at the dividend yield. As I mentioned, the dividend yield currently is 4.7%. There is good upside potential in LEG’s own 5-year dividend yield average of 3.66%. For example, if LEG were to return to its 5-year average dividend yield, the price target would be $46.67.

The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 9% discount rate and a long-term dividend growth rate of 5%. I use a 9% discount rate because of the higher-than-normal current dividend yield. The projected dividend growth rate is conservative and lower than its past 5-year average. This calculation gives a fair price target of $44.10 per share.

Averaging the three fair price targets of $54.90, $46.67, and $44.10, we obtain a reasonable, fair price estimate of $48.56 per share. These values give LEG a possible upside of 36.7% from the current $35.53 share price.

Conclusion on Leggett & Platt (LEG): A High-Yield Dividend King

LEG is a high-quality company that should meet most investors’ requirements. The company has a market-beating 4.7% yield mid-single-digit long-term dividend growth history. It’s a Dividend King with more than 50 consecutive years of dividend increases, a decent payout ratio, and the potential for shares is 36.7% undervalued. This company is a world-class corporation that is on sale. Thus, I have a buy recommendation for it.

Thanks for reading Leggett & Platt (LEG)” A High-Yield Dividend King!