Many income investors pick stocks that are household names. And there's nothing wrong with investing in the most well-known brands on the planet. But there are also plenty of stocks with lesser-known brands that investors should also consider buying for their portfolio.

Few consumers have ever heard of the diversified manufacturer Leggett & Platt (LEG 1.77%). However, the chances are high that they've purchased some of the products that include their components.

The company has raised its dividend for 51 consecutive years. But is Leggett & Platt's stock a buy? Let's take a look at its fundamentals and valuation to decide.

The company has never been stronger

Leggett & Platt manufactures products ranging from mattress springs and adjustable beds, to automotive comfort and convenience systems, to furniture and flooring products. In early August, the company shared its financial results for the second quarter, which ended June 30. The company's total sales and non-GAAP (adjusted) diluted earnings per share (EPS) were precisely what analysts were expecting. 

Q2 2021 total sales Q2 2022 total sales Growth rate
$1.27 billion $1.33 billion 5.1%

Leggett & Platt generated $1.33 billion in total sales for the quarter, which was a second-quarter record. This was in line with the $1.33 billion average analyst consensus for total sales. How did the company meet or exceed the average analyst total sales estimate for the seventh quarter out of the past 10?

Elevated inflation in the raw materials for Leggett & Platt's products prompted the company to raise its selling prices. This added 13% to the company's total sales in the second quarter.

Due to the solid demand for Leggett & Platt's products, consumers were mostly willing to accept these price hikes. The company's volume was down just 6% over the year-ago period, which was from softened demand in residential end markets and partially offset by growth in automotive and industrial end markets. Finally, strength in the U.S. dollar resulted in a 2% foreign currency translation headwind during the quarter. These factors explain how Leggett & Platt was able to post 5.1% total sales growth in the second quarter. 

Earnings continue to climb

The company recorded $0.70 in adjusted diluted EPS for the quarter, which was a 4.8% growth rate compared to the year-ago period. This was the seventh quarter out of the last 10 quarters that Leggett & Platt met or exceeded the analyst adjusted diluted EPS consensus.

Q2 2021 shares outstanding Q2 2022 shares outstanding Percentage reduction
136.8 million 136.7 million 0.1%

The company's non-GAAP net margin fell 2 basis points over the year-ago period to 7.1%. This was partly neutralized by a slight reduction in Leggett & Platt's diluted share count in the second quarter, which was due to share repurchases

And the company appears to be positioned to maintain similar earnings growth. Analysts believe Leggett & Platt's adjusted diluted EPS will grow at 5.2% annually through the next five years.

If anything, this earnings growth forecast seems conservative. That's because Leggett & Platt is targeting 6% to 9% annual revenue growth. This is achievable, in my opinion, because the company plans to do so by executing bolt-on acquisitions to bolster its market share, in addition to relying on organic growth. And Leggett & Platt also could improve its margins by increasing volume as supply chain issues are resolved and improving its operating efficiency. This is how the company's annual earnings growth could end up being nearly double what analysts are expecting.

But investors should be aware that since Leggett & Platt is a cyclical business, its growth likely won't be a smooth and linear trajectory. That's because an economic downturn would almost certainly result in a temporary decline in its revenue and profitability. This is why macroeconomic uncertainties such as inflation and softening consumer demand for products led Leggett & Platt to lower its adjusted diluted EPS for 2022 from a midpoint of $2.85 to $2.73.

A safe dividend

Leggett & Platt's 4.5% dividend yield is nearly triple the S&P 500 index's 1.6% dividend yield. Yet this dividend doesn't seem too good to be true for income investors. 

This is because it's expected that Leggett & Platt's dividend payout ratio will be around 64% in 2022. The appeal of this manageable payout ratio is twofold. First, it allows Leggett & Platt to retain enough capital to plow back into the business for growth or debt reduction. Second, it builds in a buffer for the company to maintain its dividend through almost any economic downturn.

This is why I believe mid-single-digit annual dividend growth will continue over the medium term, which is a nice combo of starting income and future income.

A wonderful business at a discount

Leggett & Platt is doing better than ever fundamentally. Yet the stock doesn't seem to be fairly valued by the market.

Leggett & Platt's trailing-12-month dividend yield of 4.4% is much higher than the 10-year median of 3.5%. The company's trailing-12-month price-to-earnings (P/E) ratio of 13.7 is considerably below its 10-year median trailing-12-month P/E ratio of 19.7. This is what makes Leggett & Platt a compelling buy for income investors at the current $39 share price.