Company Description: Leggett & Platt Inc. makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as products for non-furnishings markets.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value (see page 2 of the linked PDF for a detailed description):
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
LEG is trading at a premium to all four valuations above. The stock is trading at a 15.2% premium to its calculated fair value of $29.27. LEG did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics (see page 2 of the linked PDF for a detailed description):
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
LEG earned two Stars in this section for 1.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. LEG earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1939 and has increased its dividend payments for 42 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section (see page 2 of the linked PDF for a detailed description):
1. NPV MMA Diff.
2. Years to > MMA
LEG earned a Star in this section for its NPV MMA Diff. of the $547. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as LEG has. The stock's current yield of 3.62% exceeds the 3.08% estimated 20-year average MMA rate.
Memberships and Peers: LEG is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Hooker Furniture Corp. (NASDAQ:HOFT) with a 2.7% yield, Flexsteel Industries Inc. (NASDAQ:FLXS) with a 1.7% yield and Ethan Allen Interiors Inc. (NYSE:ETH) with a 1.6% yield.
Conclusion: LEG did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks LEG as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $34.67 before LEG's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 42 years of consecutive dividend increases. At that price the stock would yield 3.5%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 3.1%. This dividend growth rate is lower than the 3.4% used in this analysis, thus providing a negligible margin of safety. LEG has a risk rating of 1.50 which classifies it as a Low risk stock.
In spite of being a highly cyclical company, LEG has a long history of profitability and generating strong free cash flows. Its debt to total capital of 47% is slightly above my desired maximum of 45%, while its free cash flow payout of 58% is well below my 70% maximum. The stock's current yield makes it appealing to many income investors.
A recovery in the U.S. housing market and LEG's effective cost management will help increase its operating cash flow. Since the company generates more cash than required to fund dividends and capital expenditures, LEG expects to continue its share repurchase program. It has a standing authorization to buy back up to 10 million shares every year.
In late July, the company reported second-quarter 2014 results. Adjusted earnings came in 9% above the prior year at $0.48 per share. Improvement in earnings was the result of increased sales along with a lower tax rate and share count. On August 6th the company raised its dividend by a penny to $0.31 per share. Over the last 43 years, LEG has been increased its dividend at a compounded annual growth rate of 13%.
The stock is trading at a 15% to my calculated fair value of $29.27. Over the years LEG has been a steady performer in my Dividend Growth Portfolio, as such I will continue to moderately add to my position at opportune times.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock, you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in LEG (1.8% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
Disclosure: The author is long LEG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.