Get a LEG Up on the Market

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Leggett & Platt (NYSE: LEG), the diversified bedspring, automotive, and industrial manufacturer, just announced it would pay its dividend early so that shareholders wouldn't see a big tax on the dividend usually paid out in January. The early Christmas present goes ex-dividend on Dec. 10, with the dividend to be paid out on Dec. 27. Leggett & Platt seems to be one of the first companies to react to an anticipated tax increase on dividends come 2013. This Standard & Poor's dividend aristocrat is certainly shareholder attentive, but let's drill down on this company's strengths, weaknesses, opportunities, and threats.

STRENGTHS

  • The company is extremely shareholder friendly, with dividends paid since 1987, and has more than 25 consecutive years of increasing the dividend.
  • An EPS growth rate of 15%, and a P/E that currently stands at 21.59.
  • The company is diversified across many industries besides their original status as a bedspring company. It also manufactures retail store fixtures and display units, industrial parts (especially for automotive and aviation), and parts for office and residential furniture.
  • Their latest 10-K states the company plans to maintain a 4-5% growth rate.
  • The company repurchased 10 million shares in 2011.
  • Their latest Q3 earnings release on Oct. 29 beat with EPS rising 45% over the same quarter a year ago and reflected strong volume and expanding margins.
  • The yield now stands at 4.20%

WEAKNESSES

  • The payout ratio on the yield is 90%, very high for a company that is not a REIT or a master limited partnership.
  • Compensation is rated a medium concern according to the Corporate Governance Index compiled by Institutional Shareholder Services.
  • Their P/E is higher than the industry average and higher than the 15.63 P/E of competitor Genuine Parts Company (NYSE: GPC)
  • While they manufacture most of their steel wire in house, steel is their number one raw material and  fluctuations in steel prices are a continuing concern, according to their 10-K.
  • Revenue from international operations dropped due to currency fluctuations.

OPPORTUNITIES

  • The company could pay down their debt of $1.06 billion to cash of $264.90 million.
  • The company, while known for being one of the top dividend payers and raisers in the S&P 500, could ratchet down the annual increases to bring the payout ratio down.
  • Use cash to purchase more strategic assets like they did with Western Pneumatic Tube in January, almost immediately accretive to their aviation parts division, as Western Pneumatic makes critical aircraft components. They did not purchase any significant assets in 2010 or 2011.

THREATS

  • The company is vulnerable to downturns in the housing market as a furniture and bedding parts manufacturer. Mattress retailers have been significantly underforming this year.
  • The company is also vulnerable to cost increases in steel.
  • Its direct competitor, Genuine Parts Company, is much larger and competes directly on three lines of business, office furniture, automotive parts and industrial parts.
  • In the past, cheap innersprings were exported from China, Vietnam, and South Africa. In 2007 Leggett & Platt brought an antidumping suit against these foreign entities and won. Since then, this problem has abated.
  • Weakness in overseas economies could especially impact the Specialized Products division, as that division receives 75% of revenues from international sales.
  • International operations could be affected by the usual suspects in dealing overseas: currency concerns, intellectual property violations, credit risks, and geopolitical risks.
  • The company, as stated in the 10-K, is affected by consumer confidence in general and willingness of the consumer to spend on discretionary items like furniture, bedding, and autos. This also impacts the retail fixture and office furniture divisions based on whether businesses are willing to spend.
  • Another competitor that should keep Leggett & Platt looking over their shoulder is Flexsteel Industries (NASDAQ: FLXS), which competes mainly on the office furniture and  the residential furniture segment. In fact, that's all they do. Because of their concentrated focus, Leggett & Platt could lose market share, as it is larger and more diversified. Flexsteel is much smaller, however, but has a lean team and a 3.0% yield. The name is very thinly traded, and it just reported 12% sales growth on their Q1 call in October.

     
So is Leggett & Platt a buy? It is a stable company, but is tied to the health of worldwide economies and consumers' willingness to buy higher ticket items like a car or a new mattress, both of which consumers are holding onto longer and less willing to replace.  Genuine Parts Company isn't exposed to the housing market and has a smaller P/E, but also a smaller yield at 3.10% without the consistent dividend raise history that Leggett & Platt has. Flexsteel is a very small name but executing well. Your call, but if you are a yield person then Leggett & Platt may be a go-to name.


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