Friday, September 10, 2010

Legget and Platt Dividend Stock Investment Thesis

Leggett and Platt
Dividend Stock Investment Thesis


Leggett & Platt (NYSE: LEG) is a diversified manufacturer that conceives, designs and produces a broad variety of engineered components and products that can be found in virtually every home, office, and automobile, and many retail stores.  The company is 127 years old, and began trading on the NYSE in 1979.  LEG is composed of 19 business units, 19,000 employee-partners, and more than 140 manufacturing facilities located in 18 countries.

 Leggett & Platt is North America's leading independent manufacturer of the following: a) components for residential furniture and bedding; b) components for office furniture; c) drawn steel wire; d) automotive seat support and lumbar systems; e) carpet underlay; f) adjustable beds; and g) bedding industry machinery.  They also pioneered the coiled bedspring found in almost every mattress. 

Their businesses are split into 4 broad categories.  They are 1) Residential furnishings 2) Commercial Fixturing and Components 3) Industrial Materials and 4) Specialized products.  About 25% of sales occur outside the United States, principally in Europe, Canada, China, and Mexico.  No single customer accounts for over 6% of revenue, and the top 10 account for 21%. 

Leggett and Platt says that their main goal is to generate shareholder return.  They plan on doing this by conservatively running their company with sustained growth and low debt.  Their aim is 4-5% of growth a year, while i) generating more cash by improving returns, divesting  certain assets, and diligently managing working capital, ii) reducing the amount of cash used for  acquisitions and capital spending, and iii) returning more cash to shareholders in the form of  dividends and stock buybacks.

Stock Analysis

Leggett and Platt’s stock price has stayed between the high teens and low 30’s for the past 5 years.  Though LEG has been good with their money and kept their free cash flow strong, the company has not seen a great deal of increasing revenue. 


LEG has a 39 year history of increasing it’s dividends.  Of the past 48 years, LEG has paid a dividend for 47 of them.  The company states in it’s annual report that it tries to keep it’s dividend payout ratio in the 50-60% range, but acknowledges that it may be higher for the next few years.  At the current stock price of 21.19, it yields 4.8%

            Years                                                                      CAGR
              10                                                                           10.3%
               5                                                                            12.8%
               1                                                                            2%

The dividend growth has been slowed significantly in the past year.  This is a consequence of the current economic conditions. 

The dividend payout ratio usually stays near 50%.  However, the past 3 years it has reached over 100%, with 2007 having a payout ratio of 1300%.  The dividend in 2007 was 0.78 on a loss of 0.06 a share.  

The free cash flow dividend payout ratio has been steadier, averaging 34% for the past decade.

In conclusion, the current yield is within my buy range.  The growth rate of the dividend had been speeding up, but slowed significantly this past year.  The payout ratio based on net earnings has been much higher than I would like to see, but the dividend remains well covered by free cash flow. 

Income Statement

Revenue Growth                                                      CAGR
            10 year                                                            -4%
            5  year                                                             -8%
            1 year                                                             -25%

EPS Growth                                                              CAGR
            10                                                                     -7%
            5                                                                       -14%
            1                                                                        13%
Estimated EPS for 2010 is 1.24, then 1.64 in 2011

LEG has buying back shares at an average of 7% over the past 10 years

I am not extremely impressed with these numbers.  Revenue has been stagnant in the past 10 years.  It has been a tough economic time, but other companies out there have found ways to increase revenues during this time.  Even with solid share buybacks, EPS has still been erratic and decreasing. 

Balance Sheet

LEG has a solid balance sheet.  The current ratio has stayed above 2 for the past 10 years. 

Shareholder equity had decreased in this time by 1% annually.

Long term debt to equity is a low 0.50, and a total debt to equity of 0.51

Cash Flow

LEG has not had a single year of negative FCF in the past 10 years. 

FCF                                                                  CAGR
10                                                                        7%
5                                                                        14%
1                                                                        52%

Cash Flow per Diluted Share                           CAGR
10                                                                        10%
5                                                                        20%
1                                                                        59%

The Cash payout ratio has averaged 34% in this time. 

Stock Price

LEG is currently trading at 21.30, which gives us a trailing p/e of 30.43 and a forward p/e 17.18

At 21.30 the stock yields 4.79%

An intrinsic value calculation based off of dividend income and a 10 year treasury rate of 2.77% is 36.82 a share.  LEG is trading at a discount of 42% to it’s intrinsic value. 

· My intrinsic value calculation is still a work in progress


Overall, I feel luke-warm about LEG stock at this moment.  The dividend yield is high, but the p/e is out of my buy range.  The dividend is well covered by cash, but the past years increase was much lower than I would like to see.  

Their business is diverse and across international lines.  With many products and many customers I like the multiple streams of revenue they have. 

The revenue issue also concerns me.  Although cash flow is king in dividend investing, and LEG has strong cash flow and coverage, ultimately cash flow can only sustain continued increases when a company sells more of it’s product.  If it is not increasing sales, eventually cash flow must take a hit. 

Many of the products LEG parts can be found in will be necessary now and into the future, especially as new middle classes emerge around the world and need beds, cars, and new office furniture. 

I am going to be keeping an eye on LEG but I do not think I will be trying to initiate a position right now.  

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