One Massive Hidden Dividend

Believe it or not, it's still possible for opportunities to hide in plain sight.

Even when you can get all the pertinent, public information on a stock with a few mouse clicks, you can still miss amazing stocks. Actually, sometimes all this technological ease actually helps a company fly under the radar.

Today, I'll share one of these stocks -- and reveal the massive dividend it's hiding from the world.

First, some background
Even if its dividend weren't disguised, investors might still ignore this $750 million company, a quirky mini-conglomerate out of Eau Claire, Wisc. One division makes kitchenware for sale at Wal-Mart (NYSE: WMT  ) , one makes ammunition for the U.S. Department of Defense (DOD), and the last makes private-label adult diapers.

That's a pretty eclectic mix of diversification, but note that each division exists at the mercy of one primary customer. Wal-Mart accounted for about one-third of the kitchenware division's sales (or 11% of total company sales) last year; the defense division (and hence the DOD and its contractors) accounts for half of the company's sales; the adult diaper division sells to only one customer -- an outfit called Medline Industries.

The company revealed
The name of this little company with a massive, hidden dividend is National Presto (NYSE: NPK  ) .

When you look at its Yahoo! Finance profile, you'll see a tiny 0.9% dividend yield. And so does everyone else.

But here's the secret -- National Presto really has a 7.6% dividend yield!

True, the company pays out a small, regular annual dividend each year -- the 0.9% yield you see on Yahoo! Finance. Only those who dig deeper notice that National Presto has gotten in the habit of supplementing its small annual dividend with a massive special dividend. And though special dividends don't count for Yahoo!'s purposes, they do for ours!

National Presto holds no debt, sits on a nice cash balance, and pumps out free cash flow each year. Given this, it could simply bump up its regular dividend payment. But I think the company's being very wise. By only promising a small, regular dividend, it keeps its financial flexibility -- the better to weather tough times or fund an opportune acquisition.

Can the dividend last?
With three divisions, each reliant on a major customer and each with its own set of risks, it's not hard to envision National Presto experiencing some unforeseen turbulence.

For example, its latest major five-year ammunition contract with the Department of Defense (signed last year) is on a fixed-price basis, leaving National Presto is on the hook for any price overruns. Its recent sales have gotten a supplementary boost from increased defense spending for operations in Iraq and Afghanistan. And the defense industry as a whole is nervous about possible budget cuts. See the sub-10 P/E ratios of Northrop Grumman (NYSE: NOC  ) , L-3 Communications (NYSE: LLL  ) , and Lockheed Martin (NYSE: LMT  ) as proof. As a small player with just one major contract, National Presto is more exposed than these big boys.

It's not hard to envision ups and downs in the other divisions, either.

All that said, I like what I'm seeing here. The company is wisely paying out excess cash flows to its shareholders when it doesn't have a better use for that money. I believe it will continue to do so, because its CEO owns almost a quarter of the company -- and hence gets almost a quarter of the dividend payouts.

After backing out cash, National Presto sells for just 9.4 times earnings (15.0 times free cash flow). With its trailing 7.6% dividend yield and the likelihood of more to come, National Presto is one massive, hidden dividend stock that may be worth finding.   

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Anand Chokkavelu owns shares of L-3 Communications, Lockheed Martin, and Northrop Grumman. He owns one massive, hidden collection of sophomoric comedies. 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.

Wal-Mart Stores is a Motley Fool Inside Value recommendation. Wal-Mart Stores is a Motley Fool Global Gains pick. Wal-Mart Stores is a Motley Fool Income Investor pick. Motley Fool Options has recommended a diagonal call position on Wal-Mart Stores. The Fool owns shares of National Presto Industries, L-3 Communications Holdings, Lockheed Martin, Northrop Grumman, and Wal-Mart Stores. Alpha Newsletter Account, LLC owns shares of L-3 Communications Holdings. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (15) | Recommend This Article (113)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 04, 2011, at 6:18 PM, niblic wrote:

    Why bother.

    Consider, today is 4 May 2011; According to the Yahoo Fin'l the Ex-Dividend date for [NPK] was 2 March 2011. And the dividend was paid on 14 March, nice to know but quite useless until the next dividend go around.

  • Report this Comment On May 04, 2011, at 8:48 PM, vaidybala wrote:

    For NPK the horizon is cloudy; should not the private investors see through what is coming.

  • Report this Comment On May 05, 2011, at 11:12 AM, 11x wrote:

    niblic, why would you wait until next dividend go around? Did you notice the big drop in share price as soon as the ex-dividend occured? If your plan is to front run the ex-dividend date and sell afterward to plan on making money, you will be sorely disappointed. The only way to take advantage of this is to buy and hold the shares over the entire year. This isn't a get rich quick scheme.

    The lesson here is to keep an eye out for these "special dividends" that don't show up on high yield screens. I only know of one other stock off hand that does a special dividend, PGR. Other than that I don't know of many.

  • Report this Comment On May 05, 2011, at 2:41 PM, daveb8888 wrote:

    What is happening with TC, the stock keeps going down and now a delay on earnings announcement. Is it time to bail on this one?

  • Report this Comment On May 05, 2011, at 4:24 PM, DBrown7 wrote:

    Free cash flow has been strong in recent years, but going back to the mid 2000's FCF was actually negative for a couple of years and the dividend was cut in half at one point. Was there a specific cause?

    I like the special dividend payouts, but I'm concerned about how dependable they are. Should we expect a good deal of variability in the amount of the dividend?

  • Report this Comment On May 05, 2011, at 5:55 PM, vinney11 wrote:

    11x, your point is well taken. I bought NPK recently after the huge sell-of and it's up almost 5% since. I think you can get an awfully cheap price on this stock today - why wait just to get closer to the next special divvy?

  • Report this Comment On May 05, 2011, at 8:55 PM, styxriver wrote:

    In MAR 07 I bought 200 shares of OTELCO(OTT)at 20. This is an IDS stock and makes a div and interest payment quarterly of .42 or 1.68 annually(.08%). Because of the market downturn in 09 I bought 1000 shares at $9.00(.18%). Earlier this year when the stock topped 20 I sold the orig 200 shares. An IDS stock is a stock with an interest bearing note attached-therefore th div and interest payments. When the interest bearing note matures and is not replaced the $1.00/yr interest will cease but the .68 div (.075%) will still be there. Why didn't the Motley Fool peaple see this stock?

  • Report this Comment On May 06, 2011, at 8:18 AM, TMFBomb wrote:

    @DBrown7,

    Re: "Should we expect a good deal of variability in the amount of the dividend?"

    Since most of the dividend is of the "special dividend" nature, yes. NPK is intersting because of the hidden nature of its dividend and because it's selling pretty reasonably to cheaply right now. There are definitely risks in its business model -- you'll want to assess the risks of each of its three business segments, especially given each one's high reliance on a single customer.

    Fool on,

    Anand

  • Report this Comment On May 06, 2011, at 12:42 PM, rushil99 wrote:

    Of coure it is going to be a great dividend yield but it sells cheap which is a disadvantage to the stock.

    Fool on,

    frogpunch99

  • Report this Comment On May 08, 2011, at 7:08 AM, mikecart1 wrote:

    7.9% is massive? CIM gives over 10% and NLY gives even more. MO gives a guaranteed dividend. Hidden dividends are hidden because the shareholder rarely sees them.

  • Report this Comment On May 08, 2011, at 12:30 PM, pryan37bb wrote:

    Dividends are NEVER guaranteed, just ask GE during the financial crisis. As far as CIM and NLY go, their dividends might last another couple quarters, but once rates start coming back up, expect to see them get cut, although they will likely still be sizeable yields even after that since they have to pay out almost all their money to get their tax benefits. And MO's payout ratio is upwards of 80%, not unlike NPK. But NPK's is a special dividend, meaning if they don't want to pay it, or can't afford it, they just don't pay it. But imagine what would happen to Altria's stock if they just decided not to pay it. TMFBomb calls it volatility, I call it flexibility, and I'm looking to buy some fairly soon.

    Disclosure: Long MO

  • Report this Comment On May 08, 2011, at 8:58 PM, TMFBomb wrote:

    @rushil99,

    I'm unclear why selling cheaply is a disadvantage.

    @mikecart1,

    7.6% is a pretty big dividend yield. Sure, the mortgage REITs pay higher rates, but NPK has different risk/reward and business characteristics, so even if you prefer the mortgage REITs, there could be room enough in your portfolio for both.

    Re: Altria...similar answer (owning one doesn't preclude owning the other). I own Altria and certainly think it's a stock worth looking into as well.

    @pryan37bb,

    Thanks for the post...good reminder that no dividends are guaranteed.

    Fool on,

    Anand

  • Report this Comment On May 09, 2011, at 11:13 AM, useless33 wrote:

    Great writeup-

    A couple of things regarding the peculiarities of the defense contract:

    The M442 time fuze, 20mm, and 40mm contracts that NPK is sourcing on a fixed-cost basis should endure beyond the overseas obligations currently shoring up defense spending. These ammunition types are expended regularly and predictably in very large quantities during training in the US. As a result, I wouldn't necessarily draw the corollary to the other defense contractors, who principally are selling initial acquisition stuff...

    Ammo is boring, just like diapers. The real risk here is that DOD sources the contract to Olin or another ammunition manufacturer instead of NPK. Cost isn't the only issue in these contracts, as reliability rates are tracked, and particularly with regard to 40mm, failures can cause significant injury or deaths during training.

    I agree that the company will have variable dividend payouts, but am long on NPK.

    Useless

  • Report this Comment On May 13, 2011, at 3:56 PM, rfaramir wrote:

    11x,

    I don't know if it's common, but Diamond Offshore also pays a reasonable special dividend in addition to its tiny regular dividend. I also don't like that I cannot do dividend reinvestment automatically with the special one. (Poor me, forced to take cash, just don't throw me into the briar patch!)

  • Report this Comment On May 14, 2011, at 8:11 PM, stockmover wrote:

    Hi Anand,

    Are the "special dividends" NPK distributes considered qualified dividends for US tax purposes or are they considered ordinary dividends which is taxed at the investors marginal tax rate?

    Thanks,

    Rich

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