Has National Presto Industries Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, and then decide whether National Presto Industries (NPK 0.78%) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

• Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
• Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that the company can turn revenue into profit.
• Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
• Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
• Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
• Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at National Presto Industries.

Source: S&P Capital IQ. Total score = number of passes. *Includes special dividends.

Since we looked at National Presto Industries last year, the company has lost two points. Continued revenue declines and falling returns on equity were responsible for the drop, and the stock has done poorly, falling about 15% over the past year.

National Presto isn't a tough business to understand. With three primary segments -- ammunition for the military, incontinence products, and housewares and small appliances -- the company is a mini-conglomerate that has had substantial success over the years.

But National Presto's claim to fame is its dividend. The company declares a regular dividend but then tacks on a huge special payout on top. The impact of that special dividend is to push the yield from 1% to more than 7%. That can make sense in many industries, as Diamond Offshore (DO) discovered in the highly volatile energy industry with its special dividends. But when you discontinue the practice, as PDL BioPharma (PDLI) did a couple of years back, it can disappoint investors and leave them with a lot less income than they're used to getting.

Unfortunately, National Presto's business hasn't been as attractive as its dividend. Falling sales and net income have hampered the company's progress, and despite a reasonably cheap valuation, high costs for raw materials seem likely to persist into the future. Moreover, competition from General Electric (GE -1.75%) on the appliance front and from Kimberly-Clark (NYSE: KMB) in incontinence products will continue to pose a threat.

For National Presto to improve, it needs to get sales moving back in the right direction. With a tough economy and defense cuts looming, that's a tall order, but it's a necessary one if National Presto wants to get closer to perfection in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

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