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From The Survey: Leggett & Platt
Leggett & Platt (LEG) is coming back thanks to a new strategy. The diversified manufacturer of furniture parts, commercial furniture and shelving, among other things, had a tough financial stretch during the 2008-2009 recession, and the company switched its focus from revenue growth to total shareholder returns (TSR). A combination of acquisitions in higher-margined products and a focus on share buybacks have boosted earnings, and will ultimately lead to a higher stock price. This dividend provider has also raised its payout in each of the last 42 years.
The company was founded by JP Leggett and CB Platt in 1883 to produce and sell mattress springs. Through a little over 300 acquisitions made since 1963, the company has expanded product lines and entered into diverse businesses. The company changed its focus in early 2008 from revenue growth to total shareholder returns (TSR), a relative measure highlighting both stock price growth and dividend yield.
Leggett & Platt took a few hits as it first embraced its new modus operandi. The company divested its aluminum products segment along with some other smaller components, which hurt both the top and the bottom lines. The share price fell in tandem from $25 to $12. But the company’s perseverance has paid off, and the share price has since rebounded nicely, also aided by a generous stock buyback program, which has decreased shares outstanding by 16%.
Smart acquisitions and the use of cash flow have driven shareholder returns. The America’s Body Corporation purchase (2005) has played a huge part in the growth of the Commercial Vehicle products segment, while the more recent completion of Western Pneumatic in 2012 has boosted the Industrial Materials group. The larger cash flow and proceeds of the aluminum business divestitures have been redirected toward dividend payments and share repurchases, helping to bring total shareholder returns toward the top third of the S&P 500 Index.
One of the core strengths of Leggett & Platt is the diversity of its offerings. The company has large segments in the residential, commercial, industrialized and specialized segments, which are further broken down into smaller units. These smaller operations sell to furniture companies, such as Tempur-Sealy International (TPX), Bassett (BSET), Ethan Allen (ETH) and La-Z-Boy (LZB) amongst others. The commercial segment has a more diverse customer base, as it sells its store fixtures to companies such as Best Buy (BBY), J.C. Penney (JCP), CVS Caremark (CVS), Target (TGT), Verizon (VZ – Free Verizon Stock Report), Wal-Mart (WMT – Free Wal-Mart Stock Report), and Coca-Cola (KO – Free Coca-Cola Stock Report). The Wire and tubing segments include customers such as Boeing (BA – Free Boeing Stock Report) and Airbus (EADSY), and the company uses many wire products internally. The specialized segment includes customers such as Ford (F) and Toyota (TM). AT&T (T - Free AT&T Stock Report) and Dish Network (DISH) purchase from the commercial vehicles product group.
Having a large and diverse customer base across many products allows for much higher stability in returns. As no segment accounts for more than 20% of sales, the diverse revenue mix should help protect the company from the loss of any individual customer. The dividends and share repurchases, which use the increased cash flow, might help limit the downside risk here. The dividend increases are likely to continue as management seemingly has no intention of ending the 42 year increase streak. Since the company aims to maintain a payout ratio of 50%-60%, and the current payout is a little high, however, we believe increases over the next few years will be small.
Consumer confidence is a key driver of Leggett & Platt’s business, as the company is highly tied to both the cyclical housing and automobile industries. Given the recent recoveries in both these industries, the prospects for the company look good, and since the recoveries in both of these areas are in their early stages, it appears that Leggett can prosper further. The company’s new strategy has apparently helped the stock to ascend to all-time highs. Moreover, recovering markets, a higher dividend, and a new focus on shareholder return should drive its share price even higher over the long haul.
At the time of this article’s writing, the author had positions in VZ, WMT, KO, T, and BA.