To most people, Leon's Furniture Ltd. is the company that invades their living rooms with relentless "Don't pay a cent event" and "Ho ho hold the payment" TV commercials.
But to investors such as Tom Connolly, the furniture, appliance and electronics retailer is a source of growing dividends. "Leon's has turned out to be a great retirement asset," says the publisher of the Connolly Report investment newsletter.
Leon's ads may be goofy, but behind the company's playful TV persona is a conservatively run, family-controlled company that keeps a close watch on costs, avoids debt and finances growth with internally generated cash. The company boasts a bulletproof balance sheet with $207.7-million – or nearly $3 a share – in cash and marketable securities, and it owns most of its stores and the land under them.
"We're a pretty strongly capitalized company," says Terrence Leon, chief executive officer of the 70-store chain that was founded by his grandfather, Lebanese immigrant Ablan Leon, in 1909.
Leon's marketing savvy and fortress-like finances explain why, even in a soft economy, it was able to boost its dividend by 11 per cent on Nov. 14 – its seventh increase in the past 10 years. The dividend is now 40 cents annually, up from 10 cents a decade ago. What's more, the company has kicked out five special dividends in that time, including a payment of 15 cents along with the recent increase.
Based on regular dividends alone, the stock yields 3.5 per cent, and Mr. Leon said the quarterly payment is "absolutely" sustainable "barring a complete collapse of the economy, but I don't think that's coming."
Indeed, given the company's conservative payout ratio of less than 50 per cent of earnings, the dividend appears to be secure.
That's not to say Leon's has been unscathed by the economy. With consumers holding back and the real estate market slowing down, sales fell 3.4 per cent to $223.6-million for the third quarter ended Sept. 30. Profit slipped 4 per cent to $17-million or 24 cents a share. Same-store sales – which excludes new store openings – skidded 6.2 per cent.
Against the challenging backdrop, Leon's stock has tumbled 26 per cent to $11.50 from its 2011 high of $15.65 in February. Stephen MacLeod of BMO Nesbitt Burns, the only analyst who follows the thinly traded company, rates Leon's "market perform" with a $13 price target.
"We remain cautious on the furniture retail sector given sluggish consumer spending," he said in a recent note. Forecasts for flat existing home sales are also a concern because the housing market is a key driver of furniture sales, he said.
However, he praised Leon's as "a premier business, demonstrated by management's success in managing the business through a difficult environment." The stock's multiple of about 13.2 times estimated 2012 earnings is about two points higher than the average of its peers, but "we believe that a premium valuation is warranted, given Leon's track record of solid financial performance and strong balance sheet," he said.
For Mr. Leon's part, he sees the economic downturn as an ideal time to accelerate new store openings and increase Leon's estimated 7-per-cent share of Canada's retail furniture market. Since the end of the second quarter the company has opened four corporate stores and two franchises, and it recently secured sites for four more corporate stores to open in 2012 and 2013 – all financed from internally generated cash.
Why expand when the economy is weak?
"We like to invest when we feel we can get the best return on our investment. Because times are a little more difficult we're able to take advantage of some opportunities in terms of purchasing real estate or leasing properties," Mr. Leon said.
As well, the company has cut operating expenses and increased employee training to maximize productivity. "We looked at some of the costs in our stores. It could be from the way we manage our travel expenses to the way we handle our phone bills. There was no cost that was too small to look into and try to improve," he said.
With more than 70 per cent of the shares controlled by Leon family members, the stock usually trades only a few thousand shares a day. While that can create wide bid-ask spreads and make it a challenge to buy and sell at a good price, the fact that family members have such a huge stake in Leon's success – and in seeing those dividends roll in – can only be a good thing for investors such as Mr. Connolly.
"The Leons are willing to share their profits with shareholders," he says. "Who really cares about price volatility if the asset is producing income growth like this?"
John Heinzl