I've become accustomed to seeing stocks with less-than-impressive results get taken to the woodshed by investors. Tuesday, their target seems to be office-products maker Avery Dennison (NYSE:AVY), whose shares are down a little more than 1.7% as I write.

The problem, it seems, is that Avery Dennison didn't deliver the 'zazz. Sales of $1.42 billion for the third quarter essentially met estimates, for example. And while per-share earnings would have been $0.98, therefore beating the Street by $0.02, special charges of $0.13 for restructuring, asset impairment, and a reserve for environmental remediation pushed diluted earnings per share down to $0.85.

Meanwhile, full-year guidance remains at $3.60 to $3.80 per stub (though management on Tuesday sharpened its target to $3.67 to $3.77). That, too, appears to be a disappointment.

But should it be? Only if you're thinking short-term, Fool. Consider free cash flow when compared with dividend payments. Vast improvements have been made year over year, showing that the company is reinvesting in its business and increasing its payout to shareholders:


Nine months ended 9/30/06

Nine months ended 10/1/05

Free cash flow*



Dividends paid*



% of FCF as dividends



Source: Avery Dennison press release
* Numbers in millions

What's more, Avery Dennison last week announced that the Department of Justice has closed an investigation into alleged price-fixing in the label-making industry. Shouldn't that help the firm continue to exert pricing power where it can? Of course it should.

Look, I'm not going to argue that Avery Dennison's shares are steeply discounted. A forward price-to-earnings ratio that's 50% higher than the firm's long-term projected growth rate suggests otherwise.

Nevertheless, 20 years of increasing dividends by an annual average of 14% counts for something. That's why this stock doesn't deserve to be rubber-stamped as a disappointment just yet. Fools know better.

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Fool contributor Tim Beyers says his pens keep mysteriously disappearing. He suspects his three kids. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get an inside peek at all the stocks he owns by checking Tim's Fool profile. The Motley Fool's disclosure policy is always on time for departure.