In the Eye of the Shareholder

Just in time for the downturn, cash became king at Leggett & Platt.

For most companies, the arrival of a cash-oriented strategy has followed a particular sequence. Before the fall of 2008, the economy was flush with cash, and businesses sought to boost their sales as fast as they could. At that point Lehman Brothers collapsed, followed by a widespread loss of economic liquidity. Revenues dried up, and companies sought to recoup the lost sales through cutbacks and efficiencies.

But for Leggett & Platt, a large diversified manufacturer, the strategy preceded the downturn. Ironically, the company had been pursuing a growth-at-all-costs approach for more than a century. Launched in 1883, the maker of engineered parts and products used in homes, offices, and cars achieved average annual sales growth of about 15% for many of those years, according to Matthew Flanigan, Leggett’s finance chief since 2003. By 2005, however, the company had been experiencing lower growth numbers over the previous three years. “We had stalled out,” Flanigan said in an interview with CFO earlier this month.

After some intense soul-searching, Flanigan and a group of senior managers led by a then-new chief executive officer, David Haffner, decided to take the company in a completely new direction. At the beginning of 2008, Leggett launched a strategy focused more on rewarding shareholders than increasing corporate revenues. Total shareholder return (TSR), the percentage increase in share price plus dividends over a given period, became the guiding metric.

By the time the economy turned south, the manufacturer had sold many of the flagging businesses it had acquired in its lust for revenue. Just in time for the downturn, cash became king. From January 1, 2008, through November 2, 2010, Leggett’s TSR has been 37%, noted Flanigan, adding that the company has ranked in the top 20% of the S&P 500 in terms of the metric over that time.

In this edited version of CFO’s interview with Flanigan, the finance chief told how Leggett put its cash-oriented strategy into practice.

What was the thinking behind the company’s strategic shift?

We weren’t creating much value for our shareholders, and that was a problem. Another was that our traditional growth story wasn’t coming together. Why was that? We concluded, after a lot of introspection, that we were no longer in markets that were growing at the rate we had seen. We weren’t able to do nearly as much M&A work in some of those markets, because we had grabbed market share through that kind of activity previously. We stepped back and said: ultimately, the people we report to are the folks who own this company, our shareholders. And we’re not generating a lot of value for the capital they are putting in our care.

Leggett CFO

As a result, we changed our focus from being all about growth — although growth is still important to us — to a TSR orientation. We concluded that we need to really use all four tools of TSR generation: margin improvement, dividend yield, revenue growth, and stock buyback.

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