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One Massive Hidden Dividend

By Anand Chokkavelu, CFA - Updated Apr 6, 2017 at 10:02PM

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It's hiding in plain sight.

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.   

For 13 more great dividend opportunities, check out our free dividend report. It features a famous dividend stock that has two hidden dividend sources. Click here to get immediate access.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

National Presto Industries, Inc. Stock Quote
National Presto Industries, Inc.
NPK
$82.93 (0.94%) $0.77
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$139.00 (1.08%) $1.49
Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
LMT
$339.96 (1.84%) $6.15
L3 Technologies, Inc. Stock Quote
L3 Technologies, Inc.
LLL
Northrop Grumman Corporation Stock Quote
Northrop Grumman Corporation
NOC
$363.96 (1.71%) $6.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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