- Leggett & Platt just posted strong results and raised its dividend for the 50th consecutive year.
- It should continue to benefit from the stay-at-home environment, has a healthy backlog, and could benefit from the favorable trade ruling.
- I also highlight the balance sheet, valuation, and other points worth considering.
“Sell first and ask questions later” may be a good strategy for speculative names, but not necessarily for Dividend Kings like Leggett & Platt (NYSE:LEG). Those who held onto LEG over the past year and added on the weakness have done well. This is reflected by the 64% share price return over the past year.
Those who were late to the party have still done well, considering the 32% return since my last bullish take on it in February, far outpacing the 7% return of the S&P 500 (SPY) over the same time frame. In this article, I evaluate what makes LEG a continued buy and hold for the long haul, so let’s get started.
A Dividend King Worth Owning
Leggett & Platt is one of the oldest companies in America, having been in business for more than 135 years. It’s best known for manufacturing bedding products, including mattress springs and specialty foam, as well as adjustable beds, bedding machinery, steel rods, and drawn wire. In addition, LEG also manufactures furniture and flooring products as well as seating and comfort systems for the automotive industry, and specialty products for aerospace clients.
Turning to the latest Q1’21 results, LEG posted strong numbers, with revenue growing by 10% YoY, to $1.15B. EPS reached a first quarter record of $0.64 per share, an increase of $0.31 compared to Q1 of last year. These impressive results were driven by organic sales growth of 11%, due to strong demand in residential end markets and the automotive sector, offset by weakness in the aerospace segment.
It appears that LEG is seeing pricing power in the current environment, as the market was able to absorb a 5% price increase due to increases in raw material input costs. I’m also encouraged by the 240 bps YoY increase in EBIT margin to 11.1% in Q1’21, from 8.7% in Q1’19 (after adjusting for one-time events). This was driven by operating leverage on volume growth, coupled with lower fixed costs.
(Source: Q1’21 Investor Presentation)
Looking forward, I see LEG continuing to benefit from the trend of consumers investing more in at-home comforts in this work-from-home/stay-at-home environment. In addition, I don’t see a re-opening of offices as being a threat to stay-at-home plays like LEG, considering that many companies are now considering a hybrid work model, in which employees spend only a part of the work week in the office. As such, LEG should continue to see solid revenue gains for the foreseeable future.
Further supporting revenue growth is the healthy backlog in LEG’s Comfort Core innersprings business, in which management recently expanded capacity by 25% through adding staffing and equipment. Lastly, it appears that the antidumping petition on imported mattresses, brought upon by the U.S. mattress industry, is bearing fruit and should benefit the industry, as noted during the recent conference call:
“In late April, the U.S. mattress industry's antidumping petition on imported mattress from seven countries and countervailing duty petition on Chinese imported mattress came to a successful conclusion with the International Trade Commission making an affirmative final determination that the U.S. mattress industry has been materially injured by these imported mattresses sold at prices that violate U.S. trade laws.”
Meanwhile, LEG maintains a healthy balance sheet, with total liquidity of $1.4B, and a net debt to EBITDA ratio of 2.46x, sitting comfortably below the 3.0x level that I prefer to see.
Importantly, LEG just became a Dividend King, after just having raised its dividend for the 50th consecutive year, from $0.40 to $0.42 per quarter. This is no small feat, as it speaks to the durability of the business model, and management’s commitment to shareholders through economic cycles. This raise is consistent with the ~5% 5-year CAGR, and the payout ratio remains at a reasonably safe 65%.
Turning to valuation, I continue to see value in LEG at the current price of $55.97, with a forward PE of 20.6. As seen below, analysts forecast a robust 28% EPS growth this year, with an average 11.3% annual growth over the next two years.
(Source: Seeking Alpha)
LEG also has a track record of beating estimates. As seen below, LEG posted earnings surprises in all eight quarters over the past 2 years.
Risks to Consider
No investment is risk-free, and the following points are worth considering:
- Labor shortages and wage inflation could lead to operational challenges and could negatively impact the bottom line. Plus, material increases in raw material costs could also make it harder for LEG to pass on costs to consumers.
- LEG operates in a cyclical industry as its products are generally discretionary items. This makes the industry comparatively more vulnerable to recessions.
- As management noted during the recent conference call, the automotive sector may continue to see supply chain disruptions for the rest of the year due to semiconductor chip shortages. Plus, it remains to be seen how well the aerospace industry will recover for the remainder of the year.
Leggett & Platt has demonstrated its resiliency with solid first quarter results. Looking forward, I see its business continuing to benefit from consumer stay-at-home trends. In addition, the favorable ruling by the International Trade Commission on imported mattresses bodes well for the U.S. mattress industry.
Meanwhile, LEG maintains a strong balance sheet with plenty of liquidity, and importantly, LEG just reached Dividend King status with its 50th year of consecutive annual dividend raises. Admittedly, LEG is no longer cheap. However, I find the valuation to be reasonable considering the forward growth prospects and the quality of the underlying business. LEG remains a Buy.
This article was written by
I am Gen Alpha. I have more than 14 years of investment experience, and an MBA in Finance. I focus on stocks that are more defensive in nature, with a medium- to long-term horizon.I provide high-yield, dividend growth investment ideas in the investing group Hoya Capital Income Builder. The group helps investors achieve dependable monthly income, portfolio diversification, and inflation hedging. It provides investment research on REITs, ETFs, closed-end funds, preferreds, and dividend champions across asset classes. It offers income-focused portfolios targeting dividend yields up to 10%. Learn more.
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