Leggett & Platt (LEG) has proven to its shareholders for almost half a century that they put shareholder compensation first. The company has increased its dividend for 48 consecutive years and remains committed to doing so. The starting dividend yield of 4.3% is already very attractive to income investors and Leggett & Platt is guiding for 6-9% top line growth so investors can expect their income to grow in line with that estimate.
Leggett & Platt is a diversified manufacturer that designs and produces a wide variety of products such as bedding components, components for work and home furniture, automobile seat support, flooring and much more. The company offers a diversified portfolio of products with bedding (30%) driving the biggest part of the revenue. The company’s earnings are very US-focused, with more than 2/3 of total revenue coming from the US. LEG is a part of the S&P 500 and management measures their total shareholder returns (TSR) against other S&P 500 companies, aiming to be in the top third.
The company displays its priorities for deploying cash on their investor relations page.
1) To fund organic growth
2) Pay dividends
3) Fund acquisitions
4) Buy back stock
For income investors looking to live off dividend income, it is important to know that the company prefers to pay dividends before buybacks.
Latest Earnings Report
The company reported Q2 earnings at the end of July. They missed sales estimates by $70 million but beat the earnings per share estimate by $0.1. Organic sales declined by a total 6%, but with the help of the ECS acquisition the total sales improved 10% YoY. The company also revised the guidance down for the full year’s sales, but still expects a 10-14% increase compared to 2018. The EPS estimate was also lowered by a midpoint of $0.5. The company put those results down to lower than expected demand from the automotive sector and lower demand for their steel rod and wire. Positives were the 1.2% improvement in the gross margins to 22.2% and the fact that the ECS acquisition is already driving growth.
LEG stock price has declined by roughly 8% since the latest earnings call and guidance cut and is down around 20% from its February highs. As a result, the company’s stock is trading at a 20% discount when compared to its 5-yr average P/E and 32% lower than its 5-yr average P/FCF.
The ECS acquisition was financed by cash and debt. Although the company expects that to drive earnings from 2020, the balance sheet has been weakened by it. The debt-to-equity ratio has doubled to 2 and is much higher than the company’s average. Interest payments are covered by operating income 6x over, which is slightly below my criteria of 8x coverage.
Leggett & Platt is a cyclical company and is dependent on consumer confidence and the health of the overall economy. The top line growth has also stalled and was basically flat between 2012-2017, so the company started to acquire other businesses to drive its growth. It can be profitable and grow revenues as the latest ECS acquisition has shown, but comes at a cost of higher leverage (the long-term debt almost doubled with the ECS acquisition) which carries a risk. The current debt-to-equity and interest coverage ratios portray that risk and investors need to evaluate if they are comfortable with the company’s balance sheet at this stage of the cycle. For dividend investors, the dividend is not in any danger but the company is exceeding its target payout ratio so any growth in the dividend has to come from earnings growth not by elevating the payout ratio.
The company has a very impressive dividend growth track record and it is clear that the management prioritizes shareholder compensation. Combined with a starting 4.3% dividend yield, this is a company that income investors should look further into if they are comfortable with the balance sheet situation following the latest acquisition.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.