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Leggett & Platt Is Not Necessarily A Buy Right Now
Feb. 13, 2020 9:11 PM ET|
Summary
Leggett & Platt is a company with a strong market position and a well-balanced portfolio.
Company management has also set ambitious goals for the benefit of shareholders.
Nevertheless, there were also good reasons for me not to invest my money. Accordingly, the company is not a jewel or a necessary buy for me at this time.
Introduction
Leggett & Platt (NYSE: LEG) is a Dividend Aristocrat that has increased its dividend at least once a year for 47 years. I am always looking for such companies for my highly diversified retirement portfolio. Accordingly, I had considered investing in Leggett & Platt several times. I particularly liked the well-balanced portfolio and the experience of the management. Nevertheless, there were good reasons for me not to invest any money. The company is good, but as an income- or cash flow-oriented investor, there have always been better opportunities. This analysis will, therefore, mainly focus on why I do not consider the company a necessary buy or even a jewel at the moment.
Analysis
The reason why this company is interesting is because of its status as a leading manufacturer of products for everyday use. As I say this, investors have to take into account that the broad customer base of Leggett & Platt is mainly other manufacturers and not the consumers themselves:
(Source: Product Portfolio/Graph by author)
Looking at the share price performance of the last few years, however, the company has not outperformed overall. Of course, such a consideration always depends on the specific time frame, but this first historical view shows that an investment in an ETF would have been better here, simply because of the existing diversification:
ChartData by YCharts
An in-depth historical analysis of the dividend also shows that now is not a favorable time for dividend investors to buy shares of Leggett & Platt. If one takes the end-of-year returns as a benchmark and compares them with the current annual return of 3.56 percent, the following picture emerges:
(Source: Year-end yields/table by author)
Investors can easily see here that since 2000, only in five years has the end-of-year dividend yield been lower than it is now. This contrasts with 15 years with much higher yields. Especially around the time of the great economic crisis, there was a perfect time window for investors, when the company even showed double-digit dividend yields. In the meantime, there has also been no stock split that could have distorted the yield. Accordingly, the current time to invest solely because of the dividend seems unfavorable.
This would not be so bad if the company were to record high dividend growth. But here, too, the growth rates are declining in the mid-single digit range:
(Source: Annual payout growth (Yoy)/table by author)
Accordingly, the net common payout yield, a very useful metric for investors, is another indicator that shows that there have been better entry opportunities in recent years:
ChartData by YCharts
Company management targets an annual total shareholder return (TSR) of 11-14 percent, similar to the top third of the S&P 500. This would, of course, be a great deal for investors, because it means that their investment would double in less than 8 years. While no one knows the future, investors can only look back to assess if management has a track record of meeting its target. Given that, the picture changes a little bit, because the last time the company achieved this return on a 3-year CAGR basis was from 2013 to 2016:
(Source: Company Investor Day Presentation, November 18, 2019)
Accordingly, Leggett & Platt fell far short of the 2019 targets issued by management in 2016:
(Source: Company Investor Day Presentation, November 18, 2019)
Obviously, things went differently than expected. Earnings per share were lower primarily due to the Elite Comfort Solutions acquisition for USD 1.25 billion in 2018. The acquisition was also dilutive to EBIT due to amortization expenses. Furthermore, the margin was lower than expected in the Fashion Bed, Home Furniture, International Spring, and Automotive segments.
Furthermore, the balance sheet is not that great deal in my eyes. Leggett & Platt ended the last quarter with debt/adjusted EBITDA of 3.15, an improvement over the second quarter’s debt/adjusted EBITDA of 3.45. Now, it is targeting a debt/adjusted EBITDA of around 2.5 by the end of 2020. While I think 2.5 is still too high but far more reasonable, the company is a bit away from this as yet. To be fair, however, it must be said that the maturities speak against an existential threat. Debt and liabilities should, therefore, be easy to service.
(Source: Company Investor Day Presentation, November 18, 2019)
Besides, the company generates strong cash flow which should easily cover dividends and debt reduction. In the last quarter, operating cash flow was a strong USD 213 million, an increase of USD 86 million versus the same quarter in 2018.
Conclusion
After every analysis of a company, I will use a three-grade rating. Its purpose is to ensure that readers recognize at first glance whether a company might or might not be worth investing in. Here's the three-step rating at a glance.
Buy the jewel now rather than tomorrow if:
There are no downsides and the company has growth potential.*
The upsides outweigh the downsides and the company has enormous growth potential.
Worth an investment (maybe later after a second look) if:
The upsides outweigh the downsides.
The upsides are equal to downsides but the company has growth potential.
No thanks if:
No growth potential in the long term.
The downsides outweigh the upsides.
*Of course, the growth potential is a part of the upsides, but it is also crucial in my final considerations.
Conclusion: The grade for Leggett & Platt
Leggett & Platt is a company with a strong market position and a well-balanced portfolio. Management has set ambitious goals for the benefit of the shareholders. Being a Dividend Aristocrat also gives consistency and security in terms of future payouts. Nevertheless, there were good reasons for me not to invest my money. Accordingly, the company is not a jewel or a necessary buy for me at this time. These are the reasons for my grade:
Historically a rather low dividend yield.
Declining increases in payouts.
Management did not hit its targets issued three years ago.
Strong cash flow, but debt/adjusted EBITDA of over 3 leaves room for improvements.
As an income- or cash flow-oriented investor, there have always been better opportunities.
Successful Trading is the art of minimizing long term risk and maximizing capital allocation.
Recent LEG News
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