Just after 5pm EST yesterday, Leggett & Platt [LEG] announced a 2024Q2 dividend of $0.05. That is a $0.41 decrease in the quarterly dividend and the end of a 52-year streak. Is it possible for LEG to change course later this year? No. I am gutted.
Ladies and gentlemen, Leggett & Platt has abdicated the throne!
Next in Line
When a Dividend King leaves the Empire, the first question is who takes its spot?
Whereas there are 15 Dividend Kings that do business in the Consumer Staples sector, with VF Corporation [VFC] abdicating before it ever even sat down last year, and LEG doing the same today, there are now only two Kings (Genuine Parts Co. and Lowe’s Companies Inc) from the Consumer Discretionary sector. It is far more difficult to survive for decades on the whims (discretion) of the consumer than it is to thrive by selling products they cannot or will not live without (staples).
To get a minimum of five companies from the Consumer Discretionary sector in the Empire, we have to grab the three longest streaks under 50 years. Of course, McDonald’s Corp [MCD] and Polaris Inc [PII] have already been in the Empire, the latter being a position in the portfolio.
Therefore, the next Royal Heir is none other than Nike Inc [NKE].
| Ticker | Years |
| GPC | 68 |
| LOW | 61 |
| MCD | 47 |
| PII | 29 |
| NKE | 22 |
Dividend Reduction
A dividend reduction, is different than, say, a balsamic or wine reduction. The culinary reductions concentrate and enhance flavors, elevate dishes, and satisfy the palate. A dividend reduction, particularly one of this magnitude, is destructive to the income of shareholders, certainly in the short term if not indefinitely. It leaves the investor unsatisfied, with a bitter taste in the mouth.
First quarter results were in line with expectations and the adjusted CY2024 EPS guidance range remains unchanged at $1.05 – $1.35 (unadjusted EPS, $0.95 – $1.25). Further, we have comments from President and CEO Mitch Dolloff:
“Our near- to mid-term strategic priorities include strengthening our balance sheet and liquidity, improving margins by optimizing operations and our general and administrative cost structure, and positioning the company for profitable growth opportunities. Consistent with these priorities, we are reducing the dividend to free up capital to accelerate the deleveraging of our balance sheet and solidify our long-held financial strength. Over the longer term, we expect to grow our business both organically and through strategic acquisitions, while also returning cash to shareholders via a combination of dividends and share buybacks. We are confident that the actions we are taking will better position us for the future and enhance shareholder value.”
Instead of the $61.3 million in dividends that were paid out on April 15th, the outlay in mid-July will be about $6.7 million. For the full CY2024, LEG provided guidance on the dividends:
- Dividends $135 million (vs prior guidance of $245 million)
The $135 million figure reflects two quarters at the $0.46 level (already paid) and two at the $0.05 level. All this begs a question.
Did LEG Need to Reduce its Dividend?
The dividends paid per share has exceeded the earnings in each of the last six quarters. Over that time, $2.72 in dividends were paid versus $2.01 in earnings. That’s an unsustainable dividend payout ratio (DPR) of 135% and an overage of around $95 million. Now, cutting the dividend by nearly 90%(!) to $0.05 will save about $55 million per quarter. The DPR should correct course and fall well under 100% for the whole of CY2024.
Certainly, earnings need to exceed dividends over the long term. The most optimistic earnings estimate for CY2024 of $1.35 would fall grossly short of an unreduced annual dividend of $1.84 (or perhaps a penny higher for purposes of maintaining the streak). So, it is fair to say that earnings would end up being inadequate for more than two years, going on three. Some companies have the balance sheets to weather a stretch of that length. Some don’t. But before we throw in the towel, let’s take a look at the reality of the short term.
In the short term, there is the matter of cash flow. Dividends are paid out in cash after all. LEG provided guidance on the CY2024 cash flow as well:
- Operating cash flow $300–$350 million (vs prior guidance of $325–$375 million)
This means that LEG expects a minimum of $300 million in operating cash flow. That is $55 million more than what the unreduced dividend would have amounted to.
But! It is as simple as the CEO put it. The priority is deleveraging the balance sheet. They want to knock their debt down, period. Who are we to argue that one priority is more important than another? Elevated debt and making huge interest payments to service that debt is every bit an obstruction to growth as paying a common stock dividend, the growth of which is outpacing earnings. I’ve said this before – it is not uncommon for a company to use a high dividend yield (in LEG’s case over 10% before the reduction) as an excuse to cut it.
But Royal Dividends owns 44 shares of their common stock. As shareholders, we have every right to prefer companies that prioritize increasing their dividend payments, companies that reduce their dividends only as a last resort. I’m not convinced this was absolutely necessary and I need only look as far back as the great recession, and CY2009 in particular, to see that even though its DPR reached 146% for the year, LEG did not panic and slash the dividend.
The very first question after the prepared statements on this morning’s conference call asked for further detail and color behind the decision to drop the dividend to $0.20 per year. To their credit, management acknowledged that it was a difficult decision and that it was taken very seriously. The internal discussions eventually moved from just how they would continue to make the dividend payment to the flexibility they would gain if they didn’t have to make that payment. They mentioned that the profits just haven’t been high enough in recent quarters and that they know consumer demand for bedding (in particular) will eventually return but that they do not know when. And the flexibility gained from the much lower dividend will help them navigate the future.
This is a sad time for Royal Dividends and the Portfolio for the Ages. LEG has dropped 30% as of market open following the 2024Q1 quarterly earnings conference call and the position in the portfolio is down over 50%, even after taking dividends into account. Eventual removal from the portfolio is an absolute certainty because LEG no longer qualifies for inclusion in the Empire. If the position were a profitable one right now, I would very likely let it go tomorrow. However, the performance has been atrocious, and I have a strong desire to NEVER lose money on a position. I will discuss how I plan to deal with LEG in an upcoming post.
For now, it will remain in the portfolio, but the hourglass has been flipped.