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Leggett & Platt, Incorporated (NYSE:LEG) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 14th of December, you won't be eligible to receive this dividend, when it is paid on the 15th of January.
Leggett & Platt's next dividend payment will be US$0.40 per share. Last year, in total, the company distributed US$1.60 to shareholders. Last year's total dividend payments show that Leggett & Platt has a trailing yield of 3.8% on the current share price of $42.5. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Leggett & Platt paid out 94% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 39% of its free cash flow as dividends, a comfortable payout level for most companies.
It's good to see that while Leggett & Platt's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Leggett & Platt's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Leggett & Platt has delivered 4.4% dividend growth per year on average over the past 10 years.
The Bottom Line
Is Leggett & Platt worth buying for its dividend? Earnings per share have been flat and, while Leggett & Platt paid out just 39% of its cashflow, it paid out an uncomfortably high percentage of its profit. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.
If you're not too concerned about Leggett & Platt's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. For example - Leggett & Platt has 3 warning signs we think you should be aware of.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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