Published on October 12th, 2022 by Josh Arnold

Leggett & Platt (LEG) recently increased its dividend for the 51st consecutive year. As a result, it is one of the newer members of the exclusive list of Dividend Kings.

The Dividend Kings have raised their dividend payouts for at least 50 years, making them the best-of-the-best when it comes to dividend longevity. You can see all 45 Dividend Kings here.

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Leggett & Platt has a long history of steady growth, with regular dividend increases. The company struggles during recessions, but its competitive advantages allow it to recover quickly.

With a reasonable valuation, 5.5% dividend yield, and long-term growth potential, we currently rank Leggett & Platt stock as a buy.

Business Overview

Leggett & Platt is a diversified manufacturing company. It was founded all the way back in 1883 when an inventor named J.P. Leggett created a bedspring that was superior to the existing products at that time.

Today, Leggett & Platt designs and manufactures a wide range of products, including bedding components, bedding industry machinery, steel wire, adjustable beds, carpet cushioning, and vehicle seat support systems.

It designs and manufactures products found in many homes and automobiles. The company has a diversified business, both in terms of product mix and geographic split.

Source: Investor Fact Sheet

Leggett & Platt reported second quarter earnings on August 1st, 2022, and results were a record on the top line. Sales came to $1.33 billion, up 5% year-over-year, and meeting estimates. Earnings-per-share came to 70 cents during the quarter, which was down from 79 cents in the year-ago period. Management also lowered guidance during the Q2 report, but subsequently lowered it again in mid-October. The company now expects to see $2.30 to $2.45 in earnings-per-share on $5.1 billion to $5.2 billion in sales, both of which are moderately lower than prior guidance.

Growth Prospects

We expect Leggett & Platt to grow its earnings-per-share by 5% annually over the next five years. Earnings growth can be produced from multiple sources, including organic revenue growth, acquisitions, and share repurchases.

Leggett & Platt has a long-held policy of acquiring smaller companies to expand its market dominance in existing categories, or to branch out into new areas.

An example of this bolt-on strategy was the $1.25 billion purchase of Elite Comfort Solutions.

Source: Investor Presentation

The acquisition of Elite Comfort Solutions was a very large purchase for Leggett & Platt, but it does smaller buys quite frequently. Indeed, during the third quarter of 2022, the company announced the acquisition of two textiles businesses, and a hydraulic cylinder business. These small purchases help the company grow over time, but also eliminates sources of competition in the areas where it competes.

Cost controls are another major aspect of the company’s earnings growth strategy. Leggett & Platt continuously evaluates its portfolio to ensure it is investing in the highest-growth opportunities, and it is not afraid to divest low-margin businesses with poor expected growth.

For low-growth or low-margin businesses, it either improves performance, or exits the category. The company also drives cost reductions across the business, including in selling, general, and administrative expenses, and distribution costs.

Leggett & Platt has been able to reach its long-term growth targets thanks in large part to its significant competitive advantages in the core industries in which it operates.

Competitive Advantages & Recession Performance

Leggett & Platt has established a wide economic “moat,” meaning it has several operational advantages, which keep competitors at bay. First, the company enjoys a leadership position in the industry, which allows for scale.

Leggett & Platt also benefits from operating in a fragmented industry, which makes it easier to establish a dominant position. In most of its product markets, there are few, or no, large competitors. And when a smaller competitor does achieve significant market share, Leggett & Platt can simply acquire them, as it did with Elite Comfort Solutions.

Leggett & Platt also has an extensive patent portfolio, which is critical in keeping competition at bay.

Together, these competitive advantages help Leggett & Platt maintain healthy margins and consistent profitability. That said, the company did not perform well during the Great Recession.

Earnings-per-share during the Great Recession are shown below:

• 2006 earnings-per-share of $1.57
• 2007 earnings-per-share of $0.28 (-82% decline)
• 2008 earnings-per-share of $0.73 (161% increase)
• 2009 earnings-per-share of $0.74 (1% increase)
• 2010 earnings-per-share of $1.15 (55% increase)

This earnings volatility should not come as a surprise. As primarily a mattress and furniture products manufacturer, it is reliant on a healthy housing market for growth. The housing market collapsed during the Great Recession, which caused a significant decline in earnings-per-share in 2007.

Related: The Top 3 Furniture Stocks You Can Invest In Right Now

Leggett & Platt is also reliant upon consumer confidence, as roughly two-thirds of furniture purchases in the United States are replacements of existing products. When the economy enters a downturn, consumer confidence typically declines, and along with it, big-ticket purchases like furniture.

It also took several years for Leggett & Platt to recover from the effects of the Great Recession. Earnings continued to rise after 2007, but earnings-per-share did not exceed 2006 levels until 2012. The company saw another difficult year in 2020, due to the coronavirus pandemic. This demonstrates that Leggett & Platt is not a recession-resistant business.

That said, Leggett & Platt has come through previous recessions intact, and recovered strongly in 2021. In addition, it has continued to raise its dividend for more than half a century.

Valuation & Expected Returns

Leggett & Platt has an impressive dividend history given it has increased its dividend for 51 years. Shares currently yield 5.5%, an attractive yield given the S&P 500 Index yields just ~1.6% on average.

Leggett & Platt is expected to generate earnings-per-share of $2.37 for 2022. Based on a current stock price of $32, shares are presently trading at a price-to-earnings ratio of 13.5.

The company has generated steady growth over many years, with a strong position in its industry. We believe something closer to 15 times earnings is fair value for Leggett & Platt stock.

As such, expansion of the P/E multiple could boost annual returns by 2.1% per year over the next five years.

We also expect 5% annual EPS growth from Leggett & Platt. Lastly, the stock has a 5.5% dividend yield, leading to total expected returns of 11.6% per year over the next five years.

Final Thoughts

With a long history of dividend growth that recently eclipsed the 50-year mark, Leggett & Platt is one of the top blue-chip stocks.

The company is highly profitable, with durable competitive advantages to fuel its long-term growth. We expect annual returns just above 10% per year, making the stock a buy.

If you are interested in finding high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: