Leggett & Platt: A Safe Investment

| About: Leggett & (LEG)


Leggett & Platt's top and bottom lines are increasing by divesting low-performing businesses and concentrating on improving margins.

Strong cash flows are paving the way to invest in growth opportunities along with returning significant cash to shareholders.

Its past few acquisitions set the footprint to keep increasing its revenue and earnings.

Many people think that Leggett & Platt (NYSE: LEG) is a safe investment when it comes to risk assessment. Operating in the Home Furnishings & Fixtures industry, the company has demonstrated this trend by regularly increasing its quarterly dividend for the past 42 consecutive years. Therefore, it is considered to be a defensive stock to invest in. It is also among the top ten companies that have increased their dividends by 13% on a compounded annual rate.

Most of the company's business operations are very much correlated with the current economy, disposal income and housing markets. Despite that, the trend has been improving over the past two-and-a-half years with an economic recovery, represented by the numbers predicted by International Monetary Fund. The IMF predicts that the global economy is likely to grow by 3.7% in 2014 and even better in 2015. The slow growth in the economy also impacted Leggett & Platt's business. It experienced slow demand for its products over the past three years with an average revenue growth of only 3%.

The slower growth in both its top and bottom lines affected its payout since the beginning of the economic downturn starting in 2008. Its payout ratio is very high at 91.5% over the trailing twelve months. Its payout ratio is improving though, coming down from over 100% over the past five years. This represents that the company was paying more than its income in dividend payments. Nevertheless, its strong cash generating potential allowed it to consistently pay increasing dividends, as operating cash flows cover its dividend payout.

Leggett and Platt responded to the slower growth both in its top and bottom line with a three-part strategic plan. Based on the plan, it started to divest its low performing businesses and started to look for business lines with higher margins and returns. Consequently, the company started to make acquisitions while disposing of non-core businesses along with investing in its existing core business as well as working on cost savings and enhancing operational efficiencies. In 2012, it acquired Western Pneumatic Tube Holding, a leading provider of aerospace components, and in the third quarter of 2013 the company acquired a small U.K.-based aerospace tube fabrication business.

These acquisitions fall into the business strategy of concentrating on core market areas and managing its portfolio of businesses proactively and intentionally. For Leggett & Platt, these acquisitions established a strong competitive position in the higher return, higher growth aerospace market. It is operating under 20 different business segments; however, it focuses mainly on four segments: Residential Furnishings, Industrial Materials, Commercial Fixturing and Components, and Specialized Products.

Its strategy is working so far, though the company has generated only one percent growth in revenues, its bottom line has seen a 5% improvement in the fiscal 2013. With the stabilization of the economy and its strategic initiatives, the company has set healthier footprints for future growth. In 2014, it is looking to generate sales of $3.85 - 4.05 billion, a 3% to 8% growth, and EPS in the range of $1.65 - 1.85. The company continues to keep more production capability than it presently utilizes. Hence, as the economy improves, its sales can improve by about $400 million.

Slow top and bottom line growth did not hinder its cash generating potential; therefore it deserves to be called a cash machine. The company's cash from operations are covering its capital requirements and dividend payments. It generated $417 million in cash from operations; uses $81 million to fund capital expenditures; $133 million to repurchase stock and $125 million for dividend payments. After paying out dividends and capital expenditures, remaining cash flow will likely be used for acquisitions. The company is also keeping debt at stable levels, as net debt to net capital decreased to 27% versus the prior year.

In 2014, the company is expecting its operating cash flows to again exceed $350 million, capital expenditure is projected at $100 million, and dividend payments are estimated at $170 million. Leggett & Platt's dividends look absolutely safe with the ability to generate massive cash flows. Furthermore, with the improvement of the economy, Leggett & Platt will generate much better results in both its sales and earnings beyond 2014. Therefore, I firmly believe Leggett & Platt is a good stock to buy and hold for dividend investors.

Disclosure: I 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.

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