Company Description: Leggett & Platt Inc. makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as products for non-furnishings markets.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
LEG is trading at a discount to 1.) and 3.) above. Since LEG's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 7.3% discount to its calculated fair value of $33.19. LEG earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
LEG earned one Star in this section for 3.) above. LEG earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1939 and has increased its dividend payments for 51 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
LEG earned a Star in this section for its NPV MMA Diff. of $836 This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as LEG has. The stock's current yield of 5.72% exceeds the 3.75% estimated 20-year average MMA rate.
Peers: The company's peer group includes: Hooker Furniture Corp. (HOFT) with a 4.7% yield, Flexsteel Industries Inc. (FLXS) with a 3.1% yield and Ethan Allen Interiors Inc. (ETD) with a 4.8% yield.
Conclusion: LEG earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks LEG as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $35.92 before LEG's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 51 years of consecutive dividend increases. At that price the stock would yield 4.9%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is -1.6%. This dividend growth rate is lower than the 2.4% used in this analysis, thus providing a margin of safety. LEG has a risk rating of 1.5 which classifies it as a Low risk stock.
In spite of being a highly cyclical company, LEG has a long history of profitability and generating strong free cash flows. LEG's effective cost management will help the company to continue increasing its operating cash flow. LEG's free cash flow payout of 70% (down from 139%) is above my maximum, and its debt to total capital of 58% (flat) is above my maximum. The stock is currently trading below my calculated fair value of $33.19. I will wait for the dividend metrics to improve before adding to my position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in LEG (1.2% of my Dividend Growth Portfolio).
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