Leggett & Platt: A Future Dividend King With Accelerating Payout Growth

With 46 straight years of dividend increases to its name, Leggett & Platt (LEG) is a dividend aristocrat and very close to becoming a dividend king, an even more exclusive club with members boasting 50+ consecutive years of payout increases.

What makes Leggett & Platt an even more interesting investment candidate is that over the past 30 years it has rewarded dividend investors with an impressive 10.8% annual payout growth rate.

Even more intriguing? While many dividend aristocrats and kings are widely followed blue chips, Leggett & Platt is a relatively small and under-followed name.

So let’s take a look to see if Leggett is a potentially good long-term income growth investment, as well as whether now could be a reasonable time to buy the stock.

Business Overview

Founded in 1883 in Carthage, Missouri, Leggett & Platt patented the first steel coil bedspring.

Over 130 years later, the company is now a global manufacturer of furniture and furniture components (e.g.innersprings, recliner mechanisms, adjustable beds, steel wire, seat frames, carpet cushion, armrests, etc.) used in bedding, furniture, carpet, cars, planes, and more around the world.

Leggett & Platt operates 126 manufacturing facilities in 19 countries, serving a diversified customer base made up of some of the world’s largest companies.

Source: Investor Presentation

The company has four operating segments that include a total of 16 business units.

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The vast majority of the company’s sales are derived from the U.S. market; however, Leggett also has a strong presence in overseas markets, including fast-growing emerging economies such as China.

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Business Analysis

In order to maintain clockwork-like dividend growth for almost half a century, a company requires not only a stable and growing market for its products, but also a moat of some kind, meaning a competitive advantage that allows it to maintain pricing power, margins, and returns on shareholder capital over time.

Leggett & Platt’s strongest advantages are its long-standing customer relationships and reputation for quality (the company has been in the industry for over 100 years), its economies of scale as the largest player in the market (Leggett is also vertically integrated), its focus on innovation to improve profits and growth, and its global distribution system.

Manufacturing components used in mattresses, furniture, cars, and other products is usually a tough business. Buyers are focused on keeping their costs low, and many components can easily become commoditized and purchased for less overseas.

Leggett & Platt’s entry into its key markets many decades ago helped it acquire number one or number two market share positions, which it has successfully maintained through innovation and conservative capital allocation.

As the biggest player with vertically-integrated operations (Leggett owns its own steel rod mill and machinery, for example), Leggett & Platt is often one of the lowest cost providers of its products.

It has also developed innovations to adjust to shifting market trends, including adjustable beds and a “Comfort Core” innerspring used in hybrid mattresses that replaces traditional foam cores and innersprings.

Beyond product innovation and cost efficient operations, Leggett has successfully expanded the scope of its business well beyond bedding components with the help of acquisitions into a number of niches that offer higher growth and profitability.

In 1960, bedding components represented nearly 100% of Leggett’s sales. In 2016, the company’s revenue from bedding was just 20% of sales, underscoring the firm’s expansion into adjacent markets over the last 50+ years.

It’s also worth mentioning that Leggett & Platt’s markets are generally slow changing in nature. The problems solved by mattresses and furniture are timeless, and about two-thirds of bedding and furniture purchases are made to replace existing products.

This is a mature market with low-single digit growth. The manufacturing processes and materials used to produce these goods are evolving (e.g. foam mattresses) but at a mild pace.

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Disclosure: None. 

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