Leggett & Platt (LEG 0.17%) is a cyclical business, which is probably one of the most important things investors must understand before buying it. Basically, the time to buy this Dividend King has historically been when things look most bleak. I knew that going in, so I'm not too surprised that the stock has continued to languish since I bought it. Here's why I may actually end up buying more.
My holding period is long
When I buy a stock, my hope is that I'll never sell it. That doesn't always work out as planned, but I'm willing to hold on through a full business cycle as long as I feel comfortable with what is going on at the company. For example, I sold most of my 3M (MMM 0.46%) stake because I couldn't track the company's many legal headwinds surrounding forever chemicals and earplugs, not because its business had hit a weak patch. The proceeds from that sale helped fund the purchase of Leggett & Platt, another industrial stock that had achieved Dividend King status.
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Like 3M, Leggett & Platt is a cyclical business. That means that financial performance will wax and wane over time, generally tracking along with economic activity. In the case of Leggett & Platt, a key driving force is the housing market because it sells bedding and furniture components. The company has been struggling of late, but that's exactly why I wanted to buy the stock in the first place.
The dividend yield is currently around 6.5% because the stock has declined amid the business weakness. That's toward the high end of the company's historical yield range. In fact, the yield is roughly where it was back during the Great Recession.
In short, the stock looks historically cheap today. Given the long history of regular dividend increases, including through many prior rough patches, I'm willing to give management the benefit of the doubt and stick with the stock as long as the business fundamentals aren't distorted by outside factors, like the lawsuits facing 3M.
The company's performance is terrible
That said, Leggett & Platt has been doing pretty poorly. For example, second-quarter 2023 sales were down 8% year over year, with organic sales off by 11%. Earnings per share fell 43% versus the same stanza of 2022. Those are not good numbers, and the outlook isn't great either.
In fact, management lowered its top- and bottom-line guidance when it reported second-quarter earnings. It is now calling for sales to fall between 4% and 8% for the full year, with earnings coming in between $1.50 and $1.70 per share, compared to earnings of $2.27 in 2022. Although the reduced guidance wasn't a pleasing bit of news for me, I wasn't exactly shocked by the update, either. Rising interest rates have put the housing market into something of a transition period. Until the world gets used to a new normal on the rate front, Leggett & Platt will be facing a tough market.
I'm content to sit back and let the dividend reinvest since the low price today means the dividend buys more stock. In the meantime, management is working to control what it can, like cutting costs and focusing on innovation to drive long-term growth. That's all investors can expect of the company. In fact, I might even consider putting some new cash into the stock, knowing that the company has successfully lived through business downturns before.
About right is better than missing an opportunity
The key to the story here is that Leggett & Platt's problems are directionally predictable. When economic activity picks up again, notably on the housing front, the business will likely rebound. I don't know when that will happen or when the worst will be over. But I am confident that, eventually, Leggett & Platt's financial results will improve again, as they have before. That's how things go for cyclical stocks.
So I'm happy to have gotten in the door while the stock looks historically cheap, even if I didn't get in at the perfect price, because when results pick up, the buying opportunity will be long gone. I don't want to miss out on a high-yield Dividend King by trying to time the perfect entry point, something I know I can't do (and neither can most investors).
