Leggett & Platt on Monday evening lowered its full-year earnings guidance by 13%, marking the diversified manufacturer's second forecast reduction since August 1 as the economic environment remains very fluid.
Shares fell as much as 10% in after-hours trading, narrowing the year-to-date performance gap between Leggett's -13% total return and the S&P 500's -23% loss.
Management cited a significant decline in international bedding due to "geopolitical and macroeconomic disruptions in Europe," while the U.S. bedding market remains at relatively weak levels due to inflationary and monetary policy impacts on consumer spending.
Home furniture demand also softened in recent months with slower consumer demand and excess inventory at retailers, and automotive volumes are improving at a slower rate than anticipated with supply chain and geopolitical impacts bringing continued volatility.
Leggett & Platt's update is not too surprising since most of the firm's engineered components are used in "large ticket" purchases such as mattresses, cars, flooring, and furniture.
While demand for most of these goods is driven by the predictable replacement of existing products, consumers can still defer purchases when feeling less confident about the economy. Higher interest rates and lower housing turnover don't help demand, either.
Source: Leggett & Platt Investor Presentation
From a dividend safety perspective, Leggett & Platt's 2022 payout ratio will now sit near 75% based on management's latest guidance, exceeding the firm's 50% target.
This is not cause for concern as Leggett & Platt's payout ratio has hovered near this level in four of the last 10 years, reflecting the cyclical nature of the markets the company serves.
Source: Simply Safe Dividends
Importantly, operating cash flow remains on track to exceed capital expenditures and dividends in 2022 as it has in 32 of the last 33 years.
Leggett & Platt's consistent free cash flow generation reflects the company's focus on dominating niches with predictable replacement demand and ability to flex its mostly variable cost structure when demand weakens.
Management has positioned Leggett & Platt to endure tighter financial conditions triggered by rising interest rates as well.
Thanks to deleveraging efforts in recent years, Leggett & Platt's net debt to EBITDA ratio sat at about 2.4x last quarter, under management's 2.5x threshold and supporting the firm's BBB credit rating.
None of the firm's $2.1 billion of debt has floating rates, insulating cash flow from higher interest rates outside of $300 million of notes that mature this year and another $300 million in 2024. Otherwise, no debt comes due until 2027.
Leggett & Platt's liquidity position is also strong, including over $250 million of cash on hand and an untapped credit revolver with $1.2 billion of capacity maturing in September 2026.
Given the company's financial flexibility, we are reaffirming Leggett & Platt's Safe Dividend Safety Score.
We expect the dividend aristocrat to continue its track record of paying higher dividends every year since 1972 with a low single-digit raise likely in May 2023.
Economic headwinds could intensify in the year ahead if the U.S. dips into a recession. But Leggett & Platt's dividend yield north of 5% may appeal to income investors who are comfortable with the stock's sensitivity to cyclical markets.
Looking beyond the current noisy environment, Leggett & Platt should enjoy a healthy pace of long-term growth by expanding its addressable markets in bedding and automotive while developing new platforms in areas such as aerospace and hydraulic cylinders.
We will continue monitoring Leggett & Platt and provide updates as needed.
