Don't Forget About Special Dividends

Timothy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you use a stock screener to find dividend stocks, you may be missing out on companies which routinely pay special dividends. Special dividends aren't typically considered when calculating the dividend yield, so most stock screeners will miss these companies. National Presto Industries (NYSE: NPK) is one such company. Presto's regular dividend only yields 1.4%, but the annual special dividend is what makes the stock interesting.

An oddly diverse business

Presto operates with three different divisions which couldn't be further apart from each other. The small appliances business makes products like pressure cookers, deep fryers, popcorn poppers, coffee makers, and a variety of other small kitchen appliances. The defense division produces ordinance and ammunition, a strange fit for a company which also makes tea kettles. And the absorbent division makes adult incontinence products.

Presto is a small company, with just $472 million in sales in 2012. Revenue has been pretty much flat since 2007, along with net income. Presto is at best a very slow grower, so if it's capital appreciation that you're after, it's best to look elsewhere. Presto current trades at about $71 per share, with no debt on the books and about $14 of net cash per share. The EPS of $5.64 in 2012 puts the cash-adjusted P/E ratio at just about 10. This may look cheap, but it's not the main reason to consider Presto.

A very special dividend

Presto pays a regular dividend of $1 per share each year, but on top of this, the company pays a special dividend which is determined by the earnings. In 2012, this special dividend was $5.50 per share, bringing the total dividend payment to $6.50 per share. Based on this payment, the dividend yield is an astounding 9%.

Now, there's no guarantee that the dividend will stay at this level, as it depends on earnings, so the next special dividend could very well decrease. In 2011, the total dividend paid was $8.25, so the payment has decreased substantially already.

There is certainly the risk that profits continue to decline, taking dividends along with it. The company does have plenty of cash, about $100 million, but this can't sustain the dividend for more than a couple of years. Presto is an interesting opportunity, with a 9% yield possible, but there is considerable risk.

No real competitive advantages

Being so small, Presto doesn't really have any competitive advantages which give the company an edge. In the absorbent business, Presto competes with behemoth Procter & Gamble (NYSE: PG), which owns the Pampers line of diapers. Presto makes private-label products, which likely undercut the name-brand options om price, but there's no customer loyalty to speak of. As an investment, Procter & Gamble is certainly a lot safer than Presto, with $83 billion in annual sales and a myriad of well-known brands. P&G pays a 3% dividend and offers slow but steady dividend growth, something that can't be said for Presto.

In the small appliances business, Presto competes with companies like Stanley Black & Decker (NYSE: SWK). Black & Decker may be best known for its tools business, but the company makes all sorts of kitchen appliances as well. The brand name is likely more well known than Presto, and the $10 billion in annual sales dwarfs Presto's numbers. Black & Decker pays a 2.5% dividend, and that dividend has grown by about 6% annually over the past decade. Again, compared to Presto, Black & Decker offers a much more stable investment, although the possible dividend is far lower.

The bottom line

Presto is a hard sell due to tough competition in the company's industries. Presto's revenue and profits are volatile, thus making the dividend volatile as well. If the company can maintain its current special dividend, then you'd be getting a 9% yield and buying the stock at about 10 times earnings. But if earnings decline, the dividend, along with the stock price, will dry up pretty fast. There aren't too many companies which offer 9% yields, especially those which make household products, and if Presto can maintain its profitability, it could make for a very lucrative investment. But unfortunately, that's a big if.

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Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. The Motley Fool owns shares of National Presto Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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