44 Straight Years Of Dividend Growth And A 3.1% Yield: LEG

Leggett & Platt (LEG) is a blue chip dividend stock that has rewarded investors with 44 consecutive dividend increases.

With operations dating back to the 19th century and a 3.1% dividend yield, LEG is an interesting company for dividend investors to analyze.

Business Overview

LEG was founded in 1883 and patented the first steel coil bedspring. Over 130 years later, the company has grown into a diversified manufacturer of a broad variety of engineered components and products (e.g. innersprings, recliner mechanisms, adjustable beds, steel wire, seat frames, carpet cushion, armrests, etc.) used in bedding, furniture, carpet, cars, planes, and more around the world.

By end market, 21% of LEG’s 2014 revenue was bedding, 16% fabric / carpet cushion, 15% automotive, 15% steel wire, 11% furniture, 7% consumer products, 5% work furniture, 3% aerospace, 3% steel tubing, 2% machinery, and 2% commercial vehicle products.

Overall, LEG’s pegs its macro market exposure as follows: 55% consumer durables, 25% commercial / industrial, and 20% automotive.

By geography, approximately 69% of LEG’s production was in the United States, 11% in Europe, 10% in China, 6% in Canada, and 4% in other countries.

Business Analysis

After learning more about LEG and its industry, coming up with the competitive advantages that have driven the company’s outstanding long-term performance was still challenging. We believe that the company’s management team has done an excellent job managing the business, and it’s worth mentioning the incentive system in place.

LEG’s management team receives bonus compensation that is based on incentives targeting annual return on capital employed, growth in margins, and achievement of a 3-year total shareholder return in the top third of the S&P 500. Insiders also own more than 10% of LEG’s outstanding shares, further aligning their capital allocation decisions with the best interest of the company’s shareholders. The company’s culture has certainly helped its longevity.

Back to LEG’s actual operations, its strongest advantages are its long-standing customer relationships and reputation for quality (LEG has been in the industry for over 100 years), its economies of scale as the largest player in the market (LEG is also vertically integrated), its focus on innovation to improve profits and growth, and its global distribution system.

Manufacturing components used in mattresses, furniture, cars, and other products is usually a tough business. Buyers are focused on keeping their costs low, and many components can easily become commoditized and purchased for less overseas.

LEG’s entry into its key markets many decades ago helped it acquire number one or number two market share positions, which it has successfully maintained through innovation (LEG has issued over 1,300 patents) and conservative capital allocation. As the biggest player with vertically integrated operations (LEG owns its own steel rod mill and machinery), LEG is often one of the lowest cost providers of its products. It has also developed innovations to adjust to shifting market trends, including adjustable beds and a “Comfort Core” innerspring used in hybrid mattresses that replaces traditional foam cores and innersprings.