YOUR BUSINESS AUTHORITY

Springfield, MO

Log in Subscribe

David DeSonier, senior vice president of strategy and investor relations, says a strategic change in 2007 helped stabilize shareholder returns.
David DeSonier, senior vice president of strategy and investor relations, says a strategic change in 2007 helped stabilize shareholder returns.

Business Spotlight: New World Economics

Posted online
Carthage-based Leggett & Platt Inc. (NYSE: LEG) made the headlines on Nov. 8., when the multibillion-dollar company took a stand on the side of investors by paying fourth-quarter dividends early to help soften the “fiscal cliff” blow for shareholders. In addition, the publicly traded company paid the highest annual dividend of any Standard and Poor’s 500 Dividend Aristocrat company – not bad for an outfit that just five years ago was losing revenues and investors.

In 2007, the 129-year-old manufacturer of bedding and furniture components found itself in the serious situation of re-evaluating its strategies and making painful cuts in order to survive.

“The need for change had been building up during quite a period of time,” says Leggett & Platt President and CEO David Haffner. “We had acquired a significant number of smaller companies over four decades, but though they were producing revenue, many were no longer profitable. Our whole perspective was challenged. We had to ask ourselves, ‘If revenue is growing, why isn’t profitability?’”

The former growth strategy was straightforward and successful in its day, according to David DeSonier, senior vice president of strategy and investor relations.

“Our old goal was to grow revenue by 15 percent a year,” DeSonier says. “And we reached it nearly every year. Over four decades we bought many companies that were undervalued and increased our revenues by helping make them profitable.”

Mike Lawrence, a 25-year financial adviser with Edward Jones, says LEG was a reliable stock option during the growth years.

“The strategy that began in the ’60s – buying up the competition, the smaller bedspring manufacturers – worked quite well,” Lawrence recalls. “So well, in fact, that in 1975 (Leggett) faced an antitrust lawsuit. When (the company) lost the suit in 1976, (it) had to divest themselves of one bedspring plant and couldn’t buy anymore. From that point forward, Leggett diversified (its) acquisitions into related industries.”

After years of success, profitability faltered in the 2000s, share prices stalled, and investors became concerned. The economies of the world were changing, but could Leggett & Platt?

“It took awhile to realize that what we were seeing was more than a down cycle. The dynamics of the economy had changed,” says DeSonier. “When we saw that the problem wasn’t going away, we hired an outside firm to do an analysis, to take a hard look at our return on investment, and help us make a strategy change.”

After a self-study, a new strategy was devised based on a different metric. Instead of measuring success by revenue, the company would measure it by total shareholder return, the growth of Leggett’s stock value and dividends.

The TSR is established by four long-term measurements: revenue growth, margin expansion, dividends and share repurchases. Leggett’s new strategy, adopted in 2007, was based on a goal of achieving a TSR rating in the top third of the S&P 500 ratings during rolling three-year periods.  

All existing holdings were scrutinized through the lens of their contributions to TSR, and seven companies that did not make the grade were sold, sharply dropping revenues.

“The change was a bit concerning to investors,” Lawrence recalls. “The path was uncertain, and it was hard to grasp the plan. The company was underperforming. There was a time when I even stopped recommending the stock.

“What Leggett did at that point seemed counterintuitive: While business revenue was decreasing, (LEG) dividends shot up 30 to 40 percent overnight. (The company) paid the dividends out of (its) strong cash reserves. It was the dividends that kept investors loyal.”

Matt Flanigan, senior vice president and chief financial officer, says Leggett leadership was warned the strategy change could be tough on investors and employees.

“But DeSonier kept saying that we would get through it easier than they were predicting. Looking back, Dave was right,” Flanigan says. “One of the key elements that kept the company together was the number of employees who are stockholders. They think like owners, not employees.”

Leggett’s TSR performance for the three-year periods hit its goal two out of the past three evaluations. However, in a five-year review through 2012 – a graph routinely produced by the S&P 500 – Leggett’s TSR soars into the top 10 percent, far exceeding goal.

“Over time, the stock market returns about 10 percent,” DeSonier says. “To stay in the top third TSR we must, over time, average 12 to 15 percent.”

The market responded favorably.

“In retrospect, what Leggett did – reducing the size of their business while at the same time significantly increasing their dividends – was brilliant,” Lawrence says. “They pulled out of a decline, maintained their shareholder base and attracted new shareholders. With the current emphasis investors have on finding good income, many investors are turning to blue-chip dividend players, and Leggett has suddenly emerged in a very strong position.”

While the company has not returned to the coveted Fortune 500 list since dropping out in 2010, LEG recorded a new 52-week high on Dec. 4, when shares traded at $27.89 – up from a low of $19.26 per share in June.

The company currently offers investors an annual dividend of $1.16 per share for a dividend yield of 4.4 percent. With profit margins at 4.93 percent, LEG shares have gained nearly 20 percent this year.

DeSonier says the company’s 2012 year-end results and 2013 outlook is scheduled to be released Feb. 4.[[In-content Ad]]

Comments

No comments on this story |
Please log in to add your comment
Editors' Pick
From the Ground Up: Republic Intermediate School

The Republic School District is on track to open its Intermediate School for fifth- and sixth-grade students for the 2025-26 academic year.

Most Read
Update cookies preferences