Today we continue with a special 5-part series from Bob Ciura, contributing editor of Sure Dividend, highlighting the 5 highest-yielding Dividend Kings — a select group of 39 stocks that have increased dividends for over 50 years.

Read Part 1 here…
Read Part 2 here…

Shares of furniture components manufacturer Leggett & Platt (LEG) have significantly underperformed the S&P 500 Index. While the S&P generated a total return of 15% in the past one year, shares of LEG have declined 4% in that time.

The decline in share price has elevated Leggett & Platt’s dividend yield above 4%. As a result, Leggett & Platt is one of the highest-yielding Dividend Kings right now.

But high-quality Dividend Kings like Leggett & Platt typically do not remain undervalued for long. We believe Leggett & Platt has long-term growth potential, and the company will eventually recover from inflationary pressures.

Business Overview & Growth Prospects

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.

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.

2021 was a challenging year for Leggett & Platt. Inflation has picked up in the U.S., which has negatively impacted the company’s margins as its costs have been elevated across the business. However, Leggett & Platt continues to execute despite the inflationary pressures.

In the 2021 fourth quarter, sales hit a quarterly record of $1.333 billion, up 13% from the same quarter last year. Rising costs resulted in a slight decline in earnings, but the company remained highly profitable with EPS of $0.77 for the quarter.

For the full year, Leggett & Platt generated record sales of $5.073 billion, a 19% increase from 2020. Adjusted EPS of $2.78 actually grew from the previous year, showing the company’s unique ability to grow EPS even during inflationary times.

High Expected Returns

Expected returns for a stock include its future earnings growth, any dividends paid to shareholders, and the impact of a rising or declining valuation multiple. In our view, Leggett & Platt will generate expected returns above 10% per year over the next five years.

We believe the company is capable of generating 5% annual EPS growth. In addition, the stock has a current dividend yield of 4.3%. Lastly, we view the stock as significantly undervalued.

Based on projected EPS of $2.85 (the midpoint of company guidance) for 2022, LEG stock trades for a forward P/E ratio of 13.8; our fair value estimate for LEG stock is a P/E of 16. We believe this is a much better fair value P/E for a high-quality business such as LEG.

Therefore, total estimated returns are expected to exceed 12% per year for LEG stock. Not only is LEG one of the highest-yielding Dividend Kings, it is one of our top-ranked in terms of expected returns as well.

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