The goal of dividend growth investors is to pick stocks that have both lengthy track records of raising their payouts and a proven ability to keep paying out year after year. That's why Dividend Kings are so special and have so much respect among dividend growth investors. These companies have raised their dividends annually for at least 50 years straight.
The veteran manufacturer Leggett & Platt (LEG 1.17%) is a lesser-known stock that qualified as a Dividend King until just recently. But it didn't lose the title for not raising its dividend this year. Instead, it dropped off the list on a technicality. Only S&P 500 index stocks qualify for the designation and Leggett & Platt got bumped out of the S&P 500 in December.
Regardless of whether it's official dividend royalty or not, I believe this $4.8 billion (by market capitalization) stock is a great option for income investors. Here's why.
Leggett & Platt saw a rebound in revenue and earnings
Leggett & Platt is a manufacturer of a diverse set of products from mattresses, to home and office furniture, to flooring, to products for automobiles. It had a spectacular 2021 after COVID-19 disruptions to its business in 2020, and the company's revenue and non-GAAP (adjusted) diluted earnings per share (EPS) hit new highs. Leggett & Platt reported a record $5.1 billion in total sales during the year, which represents an 18.5% growth rate over the year-ago period. For more context, Leggett & Platt's total sales in 2021 were up 6.7% over the pre-pandemic year of 2019.
Several factors explain the manufacturer's strong year. For instance, accelerating inflation in the raw materials used in Leggett & Platt's manufacturing processes led the company to raise selling prices on its products. This contributed to 13% of Leggett & Platt's total sales growth in 2021 over the year-ago period.
The ongoing economic recovery that played out in 2021 also led to more consumer demand for the company's products. This resulted in a 4% increase in Leggett & Platt's sales volume. Finally, favorable foreign currency translation and acquisitions made during the year each chipped in a 1% boost to the company's total sales in 2021.
Leggett & Platt's adjusted diluted EPS surged 28.7% higher to a record of $2.78 in 2021. And even compared to the pre-pandemic year of 2019, the company's adjusted diluted EPS was up 8.2%. Aside from Leggett & Platt's higher total sales base, its non-GAAP net margin improved 60 basis points to 11.2% in 2021. This was only marginally offset by a 0.6% increase in the average diluted outstanding share count to 136.7 million for the year.
Looking out over the medium term, analysts anticipate that Leggett & Platt's adjusted diluted EPS will grow 5.2% annually through the next five years.
Leggett & Platt's dividend is well covered
Leggett & Platt's growth outlook and manageable dividend payout ratio should also support future raises in its payout. The dividend payout ratio was 59.7% in 2021. This gives the company plenty of remaining free cash flow to repay debt and execute acquisitions, which should fuel future earnings growth. The payout ratio also suggests that the dividend will be increased in line with earnings growth.
The 4.7% dividend yield is well above the market average of 1.3% and the 5% annual dividend growth potential combine to create an attractive mix of immediate income and future growth.
Leggett & Platt is a solid stock selling at a deep discount
Leggett & Platt seems to be a buying opportunity for income investors at this time.
The stock's current 4.7% dividend yield is well above the company's 10-year median yield of 3.5%. Since Leggett & Platt's fundamentals appear intact, I believe the stock will rise enough to allow the dividend to revert to its historical 3.5% range. And if that wasn't enough, Leggett & Platt's price-to-sales ratio of 1 is significantly lower than the 10-year median of 1.4. This again suggests that the stock could offer meaningful capital appreciation from the current $36 share price.