Published on January 4th, 2023 by Quinn Mohammed
Leggett & Platt may not be a well-known name, but it is likely that millions of consumers come in contact with the company’s products every day.
Despite being under the radar, Leggett has increased its dividend for 51 years in a row, meaning it is a Dividend King. The company currently has a high yield of 5.4%, which is 180 basis points higher than its trailing decade average.
Not all high-yielding businesses can sport payout ratios below 75% like Leggett is anticipated to for 2022, so deep analysis should be completed to verify the safety of high-yield stocks.
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In this article, we will analyze a manufacturing Dividend King, Leggett & Platt (LEG).
Leggett & Platt is a diversified manufacturing company. It was founded 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 is composed of three major segments.
First, the bedding products segment designs and manufactures bedding components such as bedding industry machinery, steel wire, adjustable beds, and mattress springs. This segment represents 46% of 2022 expected net trade sales.
Second, the specialized products segment revolves around automotive, aerospace, and hydraulic cylinder components. Some product examples would be seat support and lumbar systems, motors and cables, tubing, and hydraulic cylinders. This segment represents 22% of 2022 expected net trade sales.
And lastly, the furniture, flooring and textile products segment focuses on home furniture, work furniture and flood and textiles. This segment represents 32% of 2022 expected net trade sales.
Clearly, the company is running a diversified business, with a varied product mix and geographic split.
Leggett & Platt reported third quarter 2022 earnings results on October 31st, 2022. Revenue for the quarter totaled $1.29 billion a 2% decrease year-over-year. Adjusted earnings-per-share of $0.52 was down 27% from the same prior year period.
Management had also lowered its revenue guidance for fiscal 2022. The company is forecasting revenues of $5.1 billion to $5.2 billion, implying roughly 1% growth versus the previous year.
And earnings-per-share is forecasted to be $2.30 to $2.45 for 2022. At the midpoint of $2.38, this implies a 20% decline compared to the earnings-per-share that Leggett & Platt generated during 2021.
Growth at Leggett & Platt will rely on a multi-faceted approach, including average annual revenue growth (both organic, and through acquisitions), new products and programs, expanding addressable markets, and making sure that acquisitions are strategic. Additionally, share repurchases, and cost controls could also boost the bottom line.
Leggett & Platt has a consistent policy of acquiring smaller companies to expand its market dominance in existing categories, or to branch out into new markets.
An example of this 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, respectively.
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, 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.
Still, growth has ebbed and flowed at times. From 2006 through 2013, the company had practically no growth in earnings-per-share. Then from 2013 to 2016, earnings-per-share rose 70%. However, revenue and EPS declined significantly in 2020 as a result of the coronavirus pandemic.
The company’s earnings for 2021 were terrific though. However, earnings expectations for 2022 declined throughout the year and are now anticipated to be 20% below 2021 earnings. From this point on, we forecast 4.0% 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 holds back competitors. The company enjoys a leadership position in its 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, like it did with Elite Comfort Solutions.
Leggett & Platt also has an extensive patent portfolio, which is crucial in keeping competition at bay. The company has extraordinary intellectual property, consisting of over one thousand patents issued and nearly one thousand 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.
Earnings-per-share during the period 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 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’s dividend per share in 2022 equaled $1.74. Using the current forward $1.76 dividend, Leggett has a high yield of 5.4%. This high yield is an entire 180 basis points higher than the company’s trailing decade average of 3.6%.
According to Leggett & Platt’s 2022 outlook, we anticipate the company will earn $2.38 in adjusted EPS for the year. Therefore, the company is forecasted to pay out 73% of adjusted EPS out in dividends. This payout ratio is unfavorable to the trailing decade average and is above the company’s 50% target payout ratio.
However, the company has demonstrated that they are committed to the dividend, and to growing it. After all, Leggett & Platt is a Dividend King with a 51-year dividend growth streak. We expect dividend increases below the rate of earnings growth, which would see the payout ratio dip a little bit in the future.
Leggett & Platt has a strong and secure yield, which is even more impressive after considering that it has paid a higher annual dividend per share for the last fifty years straight.
While the payout ratio today is above the company’s target payout ratio, we expect the company will still grow the dividend. If the payout ratio begins to stretch, we anticipate the company would just apply token dividend increases. At times the company’s results have been very volatile, and so this may be a more prudent strategy for the company.
Leggett & Platt offers attractive total returns for both income and value investors at this price here, with high-yield, earnings growth, and valuation expansion expectations.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
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