As investors position their portfolios for 2022, quality dividend growth stocks should be in focus. Volatility has returned to the stock market to start the new year, making steady dividend growth stocks even more appealing.

Leggett & Platt (LEG) is among our top-ranked Dividend Aristocrats. The company has a number of competitive advantages to get it through the current inflationary period, while providing shareholders with consistent dividend growth.

The stock has a 4% current dividend yield, making it one of the highest-yielding Dividend Aristocrats, while we also expect the stock to generate strong returns over the next several years.

Business Overview & Recent Earnings

Leggett & Platt is a designer, manufacturer, and distributor of engineered products. Most of its business is focused on furniture supply. The company operates in three segments: Bedding Products, Specialized Products, and Furniture, Flooring & Textile Products.

Through these segments the company produces a wide array of products, including steel rods, foam chemicals and additives, adjustable beds, sewing and quilting machines, mattress packaging, lumbar support for automotive seating, engineered hydraulic cylinders, motion hardware for reclining sofas and chairs, among others.

Leggett & Platt was negatively impacted by the coronavirus in 2020, but 2021 was a notable year of recovery for the company. In the 2021 third quarter, revenue of $1.3 billion was a 9% year-over-year increase.

The company’s bottom line has been hit by inflationary pressures and rising costs of raw materials. As a result, earnings-per-share of $0.71 were down slightly from the same quarter last year. However, Leggett & Platt remains a highly profitable company, which allows it to continue raising its dividend each year.

These trends will likely show up in the company’s fourth-quarter earnings report as well. Leggett & Platt management updated its full-year guidance by raising its revenue guidance, while simultaneously lowering its earnings forecast. The company now expects full-year revenue of $5.0 billion to $5.1 billion, along with EPS in range of $2.70 to $2.80.

Market sentiment became more negative toward Leggett & Platt stock due to the downward earnings revision, but it should be noted that the company will still generate strong EPS growth for 2021. At the midpoint of full-year guidance ($2.75) the company would grow EPS by 29% for 2021.

From this perspective, it seems the company is actually performing very well fundamentally. For this reason, we view the recent stock price weakness as a buying opportunity.

Valuation & Expected Returns

Leggett & Platt shares have significantly under-performed the broader index in the past year, declining by 6% versus a 23% gain for the S&P 500 Index. However, we now view the stock as appealing for long-term returns at its present valuation.

Based on the midpoint of 2021 guidance, shares of LEG trade for a 15.3, which is below our fair value estimate of 16. This means a higher valuation multiple could lift the stock price. In addition, the company’s earnings growth will fuel a higher share price, as we expect 5% annual earnings-per-share growth over the next five years. Finally, the stock has a 4% current dividend yield.

Overall, we see the potential for 10% annual returns for LEG stock, making it a top Dividend Aristocrat for 2022.

Key Takeaways

Leggett & Platt stock has under-performed in the past year, as the company’s margins are being squeezed by rising costs. However, its revenue and earnings-per-share growth remains intact. The stock now has an appealing valuation, along with a 4% dividend yield. And, with a payout ratio below 65%, Leggett & Platt should continue to raise its dividend each year, as it has for the past 50 consecutive years. We view LEG stock as a buy for income investors.
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Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.