Leggett & Platt, Inc. (LEG): 44 Consecutive Years of Dividend Increases and a 3.1% Yield

As seen below, LEG’s dividend compounded by 7.2% per year over its last 10 fiscal years, but growth has slowed to about 3% per year more recently. The company targets a 50-60% payout ratio, which is right where it sits today. Going forward, we expect low-single digit dividend growth to continue but wouldn’t be surprised to see LEG reach dividend king status in six years.

Source: Simply Safe Dividends

Valuation

Leggett & Platt, Inc. (NYSE:LEG) trades at about 18x forward earnings and has a dividend yield of 3.1%, which is lower than its five year average dividend yield of 3.9%.

We view LEG as a well-managed business, but we don’t perceive it to have a substantial moat or long runway for earnings growth. For those reasons, we aren’t overly excited about the company at 18x earnings and a dividend yield that is below its historical average.

However, management has done an excellent job of meeting the company’s target to achieve a total shareholder return in the top one-third of the S&P 500. For the three-year period that ended on 12/31/15, LEG delivered a 23% annualized total return, which placed it in the top 29% of the S&P 500.

Management targets an annual total shareholder return (TSR) of 12-15% as follows:

– 4-5% TSR from revenue growth (half from GDP growth, half from acquisitions / share gains / new products

– 2-3% from EBIT margin improvement (20-30 basis points annually)

– 3-4% TSR from dividend yield

– 2-4% TSR from lower share count (via stock buyback)

Given our valuation concerns and lower conviction in LEG’s business quality, we would prefer to wait for a cyclical downturn in the company’s markets before getting more interested.

Conclusion

LEG appears to be a well-run business that has made the best of its positioning in very competitive markets. We believe the company’s dividend payment has above average safety characteristics but below average growth prospects. While we aren’t interested in buying the stock for our Top 20 Dividend Stocks portfolio today, we will keep an eye on it as we await an inevitable cyclical pullback.

Disclosure: None