Among his many investing maxims, Warren Buffett makes ample sense when he says “only buy something you’d be perfectly happy to hold if the market shut down for 10 years.”

                  

It gives food for thought. If you had to buy and hold a specific stock, which would you choose?

 

My choice: Leggett & Platt, Inc. (NYSE: LEG), which makes dozens of engineered products. It’s a mid-cap stock and not exactly a household name, but this dividend aristocrat has all the characteristics of an investment well worth buying and holding for the long-term.

 

 

#-ad_banner-#​Since getting its start back in 1883 as a pioneer in steel-coil bedsprings, Leggett & Platt has evolved into a leading manufacturer of myriad consumer and commercial products. For many years, the firm has been organized into four main segments, each with its own specialized offerings.

 

Residential Furnishings: innersprings; adjustable beds; furniture hardware; carpet underlay.

Commercial Fixturing & Components: standard and custom shelving, counters, showcases and garment racks for retailers; office furniture.

Industrial Materials: wire products; steel rods; steel tubing; titanium and nickel tubing for aerospace applications.

Specialized Products: car seat suspensions; automotive control cables; quilting machines for mattress covers; van interiors.

 

Not the most exciting lineup in the world, I know. But highly useful products like these are just what enable the firm to generate the reliable profits and cash flows crucial for a dividend aristocrat.

 

A company is deemed a dividend aristocrat after increasing its dividend payout each year for the past 25 years, and it must continue to do so each year to maintain that status.

 

Its current $1.24 a share dividend, good for a 3% yield base, has been growing at an 8% pace over the past decade. The most impressive part: LEG has raised their dividend payout for the past 43 consecutive years.

2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	Current
$.58	$.63	$.67	$.78	$1.02	$1.06	$1.10	$1.10	$1.14	$1.18	$1.21

Leggett & Platt’s management takes a page out of the Jack Welch playbook and makes sure that the company has the first or second market share position in each of its niches.

 

This is a company that always lives within its means. Operating cash flow, for example, is typically more than enough to cover capital spending and dividends. The past 12 months have been no exception, with $394 million in operating cash flow versus dividends of $167 million and capital spending of $84 million.

 

If something isn’t working well, management isn’t shy about making a big change — including total divestiture. That’s just what’s happening with fixtures & components, which has generally shown subpar margins and badly lagged the other three main segments in sales growth for some time.

 

A 6% drop in sales in 2013 (to $456 million) was apparently the last straw for this division. Management began shopping the segment around earlier this year and recently sold three-quarters to Nebraska-based competitor Lozier Corp. for $62 million. (It’s still looking to sell the remaining quarter.)

 

Although the deal is actually expected to produce a small $0.04-per-share net loss in the fourth quarter, it does give Leggett & Platt additional capital to reinvest in more successful ventures. A great candidate is the largest segment by revenue: residential furnishings, which for years has generated solid sales gains and high single-digit EBIT (earnings before interest and taxes) margins.

 

This year, the division is on pace for sales of about $2.2 billion, up 10% from a year ago. The division typically generates 8.0-to-8.5% EBIT margins.

 

In July 2014, LEG made a $48 million purchase of three U.S. bedspring production plants from bedding maker Tempur Sealy International, Inc. (NYSE: TPX). The two firms also announced an expanded supply agreement that makes Leggett & Platt the exclusive long-term provider of wire mattress innersprings for Tempur Sealy and boxsprings for its Sealy subsidiary.

 

Considering all the economic and political issues facing Europe, the Middle East and Asia, I’m glad Leggett & Platt does more than 70% of its business in North America. It can always more aggressively pursue foreign growth once the international picture improves.

 

In the meantime, it’s expanding judiciously overseas, like in China where the company’s automotive products are expected to do especially well.

 

Companywide, margins should benefit from lower raw material costs, particularly petroleum and scrap metal — two key product inputs for Leggett & Platt.

 

Importantly, the firm eliminated a significant source of uncertainty recently by settling a group of lawsuits accusing it and 20 others in the industry of fixing the price of the polyurethane foam used in many of their products. The settlement, $39.8 million or $0.17 per share, had no effect on management’s full-year guidance for 2014.

 

Risks To Consider: Leggett & Platt has been named as a defendant in a half dozen other antitrust suits like the one it recently settled. It’s too early to accurately estimate the potential cost to the company.

 

Action To Take –> Don’t fret about Leggett & Platt’s antitrust issues. Since management believes the remaining cases together involve lower foam sales than the cases recently settled, it’s quite possible any further settlements can be absorbed without excessive bottom-line damage.

 

Thus, I’m confident the company can achieve consensus projections for profits to rise 15% annually. After all, this company has a track record of double-digit earnings growth. At the historic earnings multiple of 22, this implies more than 90% upside potential for the stock. Cash flows should remain strong, too, leaving plenty of room for the regular dividend raises Leggett & Platt shareholders have enjoyed for so long.

 

Now that you have a reliable divided-paying stock, you need a strategy to fully utilize it. Our resident income expert Amy Calistri is a master at finding dividend paying stocks and making them work for you — and your retirement. Her strategy is so successful that she was invited to speak in front of a live studio audience at St. Edwards University. To find out how she got a dividend paycheck for each day of the year, click here.