This Long-Term Play Pays 4%

Leggett & Platt (LEG) increased its dividend for the last 50 years consecutively.

The manufacturer of c components and products for homes, offices, and autos embarked on a strategic transformation back in 2007.

Its goal – divest from low-performing businesses and improve margins and returns.

Step one is now complete.

As the company moves into phase two, it faces supply chain challenges that plague many manufacturers today.

However, we feel the current share price creates an opportunity for investors with a multi-year outlook to dip their toes in the water.

With a mammoth 4% dividend and investment-grade balance sheet, we expect a broader rotation into financially sound companies to benefit LEG.

Plus, it’s the top home products stock search amongst financial pros in December.

So we know there’s interest amongst the big players.

Leggett & Platt’s Business

You may have not heard of LEG but chances are you’ve touched one of their products.

Started back in 1883, the Missouri-based company designs, manufacturers, and markets engineered components and products used for homes and automobiles.

Sales divide into Bedding (47.6% of revenues), Specialized Products (20.8% of revenues), and Furniture, Flooring & Textile Products (31.5% of revenues).

LEG employs more than 20,000 people with production in 17 countries around the world with more than 2/3rds coming from the US.

Management plans to grow revenues at 6%-9% annually through a combination of organic growth and acquisitions.

In Q2, LEG acquired Kayfoam, a leading provider of specialty foam and finished mattresses, primarily serving the UK and Ireland.

Then in May Leggett acquired a Poland-based small manufacturer of bent metal tubing used in office and residential furniture.

You can read about the criteria the company uses to evaluate acquisitions on its website.

Financials

Like most manufacturers, LEG took a hit in 2020 as Covid shuttered operations and dampened demand.

Otherwise, the company shows fairly consistent revenue growth when you take into account the various divestments and acquisitions over the last decade.

More important, you can see margins improve as the company shed poor performing assets.

Plus, management delivered shareholder friendly returns with a growing dividend and sizable share buyback.

We’d also like to point out the general increase in cash flow over time.

In the most recent quarters, while sales rebounded, LEG struggled to meet demand as supply and labor constraints hindered production.

Additionally, increased raw material costs pushed margins lower by a significant amount.

However, we expect supply chain issues to abate next year, while the company increases prices to recover lost margins.

Lastly, we want to highlight LEG’s fortress balance sheet.

Currently, there is less than $1.8 billion in long-term debt on the company’s balance sheet.

In fact, the company has a current ratio (current assets to liabilities) of 1.64x and a total asset to total debt ratio of 1.43x.

Valuation

Our valuation analysis delivered some interesting results.

While current price puts LEG at a discount to its own 5-year average, in several cases, the company trades at a premium to the consumer discretionary sector.

You can see that the P/E GAAP ratios are slightly better than the sector average, but non-GAAP ratios are not.

Even the price-to-sales ratio is not remarkably better than the sector.

And price-to-book ratios are higher than the sector as is the price-to-cash flow.

We believe a lot of this boils down to the speed at which labor, raw material, and transportation costs have hit LEG compared to the company’s price increases.

As noted earlier, once the increases catch up to inflation, we expect margins and cash flows to improve.

Our Opinion – 9/10

While we would prefer a bigger discount, current share prices provide a nice value.

And the massive dividend can be reinvested to juice up returns.

At $40 per share, we see upside to $50-$55 over the next several years.

Coupled with a reinvested dividend, investors could look for an annual return of around ~15%.