Finally, LEG’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.
LEG ultimately targets 4-5% annual revenue growth and consistent margin improvement driven by cost savings, new product development, and modest market growth.
Leggett & Platt’s Key Risks
LEG’s business is sensitive to several macroeconomic factors that are beyond its control. Changes in raw material costs (steel) and consumer spending trends have materially impacted LEG’s sales and earnings in the past, and we expect them to remain important factors going forward over short-term periods.
The best time to buy macro-sensitive stocks is when demand is weak and sentiment around the business is overly pessimistic. This is not the case with LEG. Its operating margin reached its highest level since 1999 last quarter, and strong growth in automotive markets have helped fuel LEG’s sales growth over the last five years. Additionally, sales of existing homes have been very strong, generating decent demand for mattresses and furniture.
While these factors impact LEG’s business over the near term and seem to indicate lower timeliness for the stock today, they are less relevant to the company’s 10-year outlook.
Our primary concerns with Leggett & Platt, Inc. (NYSE:LEG) are its margins. As a component supplier to price-sensitive markets like furniture and automobiles, LEG’s customers are always looking to save costs. With the bulk of its production in the U.S., it’s hard to imagine LEG maintaining a cost advantage over international players with cheaper labor, resources, and currencies.
Many of LEG’s customers could also be forced to relocate or outsource more of their furniture and mattress manufacturing overseas to remain competitive in an increasingly global economy. LEG doesn’t have nearly as large of a manufacturing footprint outside of the U.S., which represented about 70% of its capacity last year, and could gradually be left behind with underutilized factories.
LEG’s sprawling operations could eventually come back to hurt the company as well. LEG has 18 business units, which is a lot to manage and try to be great at. If the company loses focuses or has to reorganize, it could erode some of LEG’s advantages. However, its business diversification also protects it from missing out on consumer trends, such as the move to memory foam mattresses.
It’s also worth noting that LEG’s top 10 customers accounted for 27% of its sales – if a major customer decides to source its components somewhere else or fundamentally change a product, LEG could experience a near-term earnings hit.
Dividend Analysis: Leggett & Platt
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. LEG’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
We think LEG’s dividend is reasonably safe and have assigned the company a Dividend Safety Score of 66. While the company is somewhat cyclical and has slightly above-average payout ratios, it is a great free cash flow generator in practically every market environment.
LEG’s earnings and free cash flow payout ratios over the last 12 months are 68% and 57%, respectively. LEG’s earnings payout ratio was impacted by non-cash goodwill impairment charges in recent years, so we will look at the company’s free cash flow payout ratio instead. As seen below, LEG’s payout ratio has increased a bit over the last decade but has otherwise remained between management’s 50-60% target for most of the last five years, providing some cushion (no pun intended) and room for modest growth.
Source: Simply Safe Dividends