“Aerospace, solar power, nanotechnology... you won’t see Warren Buffett shopping in these 21st century sectors. There are far too many variables involved to predict future cash flows with any degree of certainty. Instead, he’s built his fortune on dependable companies like Kraft Foods (NYSE: KFT) and Coca-Cola (NYSE: KO)—stable, predictable, and let’s just say it, boring. Our ‘Undervalued Stock of the Month’ for February certainly fits the bill. It’s unquestionably stable and predictable, as you might guess from a company with 38 straight years of dividend hikes and a payout that has risen 155-fold over that time frame. As for being boring, well, let’s just say that box springs and steel wire don’t exactly get investors’ adrenaline running.
“Leggett & Platt, Inc. (LEG 18.67 NYSE – yield 5.60%) is the world’s top supplier of mattress springs, frames, and other internal mechanisms for beds, recliners, loveseats and sofas. Other major products include carpet padding, automobile power seating systems, and industrial machinery. The firm also has a commercial division that rolls out shelving, merchandise displays and other retail store fixtures. These products will always have a place. The company’s first bedsprings were delivered by horse-drawn carriages in the 1880’s. Countless thousands of businesses have become obsolete and failed since then—but Leggett & Platt is still going strong.
“The company is one of a few suppliers selling to a wide base of customers. Imagine if there were 10 bakers in your area and you were the region’s only supplier of sugar and flour. Clearly, you would have the upper hand when it came time to negotiate prices. As the dominant supplier in its space, Leggett & Platt enjoys a similar competitive position. The firm gets a steady flow of orders from customers such as Serta, Sealy, Ethan Allen, La-Z-Boy, and Ashley Furniture (and no single customer accounts for more than 5% of the firm’s sales). As for its own needs, the vertically- integrated company has cut out the middleman (and the mark-up) by building North America’s largest steel wire and tubing manufacturing plants. Those mills produce over 500,000 tons of steel wire each year—and any leftovers not used are sold to outside customers.
“Leggett & Platt has been diligent about returning wealth to shareholders over the years. In fact, dividends have been hiked in 46 of the past 47 years and grown at an impressive 14% annual pace since the 1970’s. The yearly payout jumped 39% in 2007 to $1.00 per share. Despite the recession, it has since been raised to $1.04 per share—for a robust yield of 5.2%. But with $900 million in cash flow during the past two years, there has been more than enough money to go around. Management has also bought back 23 million shares (a meaningful 14% of the firm’s outstanding stock). And through the roller-coaster years of 2008 and 2009, total shareholder returns scored in the top 3% of the S&P 500.
“Looking ahead, we like the fact that management has been willing to chop away dead weight. Business units that fail to deliver returns in excess of their weighted average cost of capital (WACC) aren’t allowed to drag long. And the company has just divested six divisions (pocketing $420 million) that will make it leaner and more profitable. Heading into the fourth quarter, the firm has already produced enough cash ($430 million) to meet the $250 million needed for dividends and internal capital expenditures—with $180 million to spare. Management also just upped its full-year earnings guidance.
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“It speaks volumes that Leggett & Platt can expand margins and churn out ample cash despite sagging demand in one of the sharpest downturns on record. Heavy restructuring and cost cuts leave the company well-positioned for upside earnings once business stabilizes. In the meantime, we see further dividend hikes on the horizon. And it never hurts that senior executives are not only investing millions in the stock each year, but also have compensation packages tied to returns—which aligns their interests with those of the rank-and-file shareholders. With a brighter outlook, a robust 5.2% yield, and attractive upside of 66% to Fair Value, I consider LEG a strong candidate for my Yield Doublers Portfolio.”
Nathan Slaughter, StreetAuthority Half-Priced Stocks
