In the world of small, boring companies, it is tough to top Oil-Dri (NYSE:ODC), the maker of kitty litter and other consumer and industrial absorbent products. When it comes to investing, though, boring can be very beautiful, and that appears to be the case with Oil-Dri.

Oil-Dri's results for this year are below the trend of the last few years, but not entirely disappointing. For the year, sales grew 9% to $205.2 million, but diluted earnings per share fell from $0.88 a share last year to $0.73 a share this year. The reason for the decrease falls squarely on margin compression.

Rising energy costs played a big role in the company's results; processing clay and other materials requires energy, and packaging costs also increased because of energy. Increased energy costs are a large part of why paper goods and packaging companies such as Kimberly Clark (NYSE:KMB) and Packaging Corp. of America (NYSE:PKG) also saw their results hampered in the past year.

On its conference call, Oil-Dri stated that it purchases half of its fuel in advance and then purchases the other half as needed. With prices running high after Katrina and again in the most recent quarter, the company's results suffered.

4Q 2006

3Q 2006

2Q 2006

1Q 2006

4Q 2005

Gross Mgns.

17.52%

19.40%

19.60%

17.60%

20.30%

Net
Mgn.

2.21%

2.40%

3.50%

2.20%

2.50%
Data provided by Oil-Dri and Capital IQ, a division of S&P

Of course, with oil prices coming down rapidly this quarter, the reverse should be true in the company's first quarter. More important is that energy prices are relatively stable. Assuming that prices also remain stable, a business like Oil-Dri should be able to do quite well as it manages volume and pricing. But wild swings down or, especially, up wreak havoc -- as we've seen in the last year.

Looking around at all the opportunities on my watch list, I must admit I'm intrigued by Oil-Dri. At first glance I would put it near the top of the list, given its market position and the potential for margins to normalize through the combination of price increases and energy cost decreases. The shares also yield 3.7%. There's no doubt that some investors will point to that dividend and say that it wasn't funded by free cash flow in the past year. That's true, but I believe margins will normalize, so I think the dividend is ultimately safe, and I think people will continue to need and buy the products that Oil-Dri provides. That's a pretty attractive package.

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At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.