Monday, September 21, 2009

* Leggett & Platt Inc. (LEG) Dividend Stock Analysis

This article originally appeared on The DIV-Net September 14, 2009.

Linked here is a detailed quantitative analysis of Leggett & Platt Inc. (LEG). Below are some highlights from the above linked analysis:

Company Description: Leggett & Platt Inc. makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as diversified products for non-furnishings markets.

Fair Value: I consider 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 only 1.) above. The stock is trading at a 146.2% premium to its calculated fair value of $7.57. LEG did not earn any Stars in this section.

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 three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no years with negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45% and 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 37 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)? 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 the $867. 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 5.47% exceeds the 3.9% estimated 20-year average MMA rate.

Other:LEG is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. In spite of operating in a cyclical industry, LEG has a long history of profitability and strong free cash flows. LEG's markets have mostly stabilized, but demand will likely be slow until the economy recovers in 2010. The company expects to generate more than $400 million in operating cash in 2009. Risks include poor market conditions and increases in raw materials costs.

Conclusion: LEG did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks LEG as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $21.91 before LEG's NPV MMA Differential fell to the $500 that I like to see for a stock with 37 years of consecutive dividend increases. At that price the stock would yield 4.65%.

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 0.2%. This dividend growth rate is lower than the the 2.0% used in this analysis, thus providing a margin of safety. LEG has a risk rating of 2.50 which classifies it as a high risk stock.

LEG has many good attributes working in its favor including: Excellent Free Cash Flow Payout at 34%, and Debt To Total Capital at 32%, a good NPV MMA Diff. and a favorable dividend yield and a long history of dividend increases. However, LEG is trading significantly above its buy price of $7.57. Near-term I will not be a buyer, but this is a stock I will keep a close watch on. For additional information, including the stock's dividend history, please refer to its data page.

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 held no position in LEG (0.0% of my Income Portfolio).

What are your thoughts on LEG?

The the home improvement retail industry tends to be very cyclical and relies on economic growth. However, LOW is a strong player with opportunities for growth both domestically and abroad. Aging homes and relatively high home ownership rates are powerful long-term demographic drivers that should help mitigate the continued weakness in residential construction. Consumers viewing their homes as investments will continue to spend money on home improvement projects. Risks include a sharp slowdown in the economy, a large rise in long term interest rates and the inability of LOW to execute its expansion strategy.

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