Leggett & Platt (LEG -0.73%) is not a good stock for conservative investors. In fact, the manufacturer of a diverse group of products has seen its share prices fall nearly 60% from their 2021 highs. That's painful, but perhaps it's understandable given the company's cyclical business. Right now, clearly, is not a great time.
But, as through many previous business downturns, Leggett & Platt controls what it can and muddles through and keeps rewarding its shareholders along the way.
The big attraction with Leggett & Platt
There are two things that make Leggett & Platt attractive to income-oriented investors. First, the yield at the moment is a hefty 7.5%, which is near the high end of the company's historical yield range. The last time the yield was so high was during the Great Recession, a deep financial downturn that was led by a tumbling housing market.
LEG Dividend Yield data by YCharts
The second factor that dividend investors will find alluring is Leggett & Platt's status as a Dividend King. At this point, the dividend has been increased annually for 52 consecutive years. The dividend gets raised consistently through various recessions, during a global pandemic, in a period of rapidly increasing inflation, and despite whatever other headwinds come along. The past doesn't predict the future when it comes to investing, but the board of directors clearly has a material commitment to keep growing its dividend.
For more aggressive investors who can handle owning a company that operates in a cyclical industry, Leggett & Platt could be worth a deep dive.
The problem with Leggett & Platt
No company is perfect and that's a particularly true statement for this industrial stock. It is one of the largest players in the bedding space, selling to manufacturers. It also has a material footprint in the furniture sector, again selling to furniture makers. There's flooring and fabrics in the mix, too. Basically, when the housing market is booming Leggett & Platt will probably perform reasonably well. When that's not the case, or the housing market is in a funk, the company struggles.
The latter is the case today, thanks to fast-rising interest rates that increasingly push buying a home out of reach because most people need a mortgage to afford such a large purchase. Inflation, which increases the cost of houses, is another headwind to the sector. The housing market is still trying to figure out where things are going. And that's resulted in weak earnings for Leggett & Platt, since people often buy beds and other furniture items when they buy a home.
For example, revenues fell 9% year over year in the third quarter of 2023. Adjusted earnings of $0.36 per share represent a drop of nearly 70%. That is not pleasant reading, but it gets worse. The company also lowered its full-year 2023 guidance when it reported third-quarter earnings, so things are going to get worse before they get better here.
And yet, none of this was particularly unexpected. There really were no big ugly surprises, just more of the same bad news that's been in place all year long. Management is busy working on the things it can control like investing in innovation and protecting cash flow. Notably, the company's cash from operations was higher in the first nine months of this year than it was last year thanks to improvements in both the accounts payable and accounts receivable lines on the cash flow statement. These aren't long-term fixes, but they help the company support the dividend and reduce leverage. Basically, management just needs to bridge the gap until the cyclical markets it serves pick up again.
Leggett & Platt isn't for everyone
While there's nothing all that surprising in Leggett & Platt's financial performance right now, given the business, it is still a highly volatile company. The weak housing market is a major headwind and until things start to look better for that market, this bedding supplier will be under pressure.
Given the cyclical nature of the company, this high-yield Dividend King probably isn't a great fit for more conservative investors. However, for those with a bit more of a risk appetite, buying a cyclical stock when things look bleak can often end up being a winning call.
