-National Presto Industries (NPK) is an excellent small-cap dividend growth stock.
-The annualized earnings growth rate for the past 6 years has been 26%.
-The annualized dividend growth rate for the past 6 years has been 38%.
-Current dividend yield is a whopping 6.5% despite the impressive growth.
-The company boasts a squeaky clean balance sheet- tons of cash and no debt.
-NPK’s CEO, Maryjo Cohen, owns 30% of the company, so this company is the very definition of “shareholder friendly”.
-All of this comes with a P/E of under 14.5 as of this writing.
-If you want a high-growth small-cap with unbelievable long term upside potential and a dividend yield of 6.5%, this is an excellent company look at.
-Conclusion: Attractively valued as long as it remains below or dips under $140.
-Dividend Monk Rating: A+
How to Read My Stock Analysis Reports
Sometimes dividend stock portfolios can be too concentrated in large-cap stocks. What I truly love to see is a small or medium sized company with reasonable growth prospects paying a dividend. To me it’s the best of both worlds. National Presto Industries, Inc. is just that sort of company.
NPK has been in business for decades, and currently consists of three business segments:
-Housewares/Small Appliance Segment
-Defense Products Segment
-Absorbent Products Segment
That’s good diversification, ranging from pressure cookers to ammunition to private label adult diapers. With a market cap of less than $850 million, they are still spread out in these very diverse segments.
Earnings have grown from $15,447,000 in 2003 to $62,576,000in 2009. Annualized, that’s a 26% annual earnings growth rate over 6 years. The most recent year’s growth, from 2008 to 2009 was from $ 44,183,000 to $62,576,000 in 2009, which is a 41% increase.
The best part is the dividend. NPK pays a base $1 dividend every year. This is the dividend that shows up on stock screeners and the like. With such a low yield, people barely take notice. But, NPK also pays an extra dividend every year based on profits. The 5-year annual dividend growth rate from 2004 to 2010 is over 38%. All dividends paid are adequately covered by earnings, and they reserve dividend flexibility by calculating their annual dividend based on their annual earnings.
2010- $1 regular dividend + $7.15 extra dividend = $8.15 dividend (6.5% yield)
2009- $1 regular dividend + $4.55 extra dividend = $5.55 dividend (9% yield)
2008- $1 regular dividend + $3.25 extra dividend = $4.25 dividend (7% yield)
2007- $.95 regular dividend + $2.85 extra dividend = $3.80 dividend (6% yield)
2006- $.92 regular dividend + $1.20 extra dividend = $2.12 dividend (4.5% yield)
2005- $.92 regular dividend + $0.75 extra dividend = $1.67 dividend (3.7% yield)
2004- $.92 regular dividend + $0.25 extra dividend = $1.17 dividend (3% yield)
With nearly $30 million in cash or cash equivalents and over $300 million in current assets, NPK has a quick ratio of 3.9 and a current ratio of 5.9, and virtually zero debt. In addition, the long-tenured chairperson and CEO Maryjo Cohen currently owns a whopping 30% of NPK. With hundreds of millions invested into this company, her interests are aligned with shareholders. That explains why this has been such a shareholder friendly company over the last several years.
All of this comes with a current trailing P/E of under 14.5.
Like any company, NPK has risks. Their main segment is their appliance segment, which is currently very strong, but in a very competitive market. Their largest customer is Wal-Mart, which provides 10% of the revenue for this segment. They have high margins, and seem to be gaining sales due to more people eating at home. Their absorbent products section has low margins and is difficult due to high complexity to maintain according to the 2008 annual report, but they have stable contracts. Their defense segment was worrying me for a while, but as of their most recent report, their contracts have been renewed for another 5 years. There could be some long term risk in that segment due to an unclear political future. This is the one segment of the company that seems a bit speculative to me, as I don’t usually invest in defense companies. The one aspect of their fundamentals that I take caution with is their less-than-reliable cash flow growth, which is likely due to their military contracts. In addition, with the market being very unstable lately, there is the possibility of a significant market correction ahead. Since shares of NPK more than doubled since the market low in 2009, there is a risk of a setback, even though I still believe the shares to be undervalued. If the market does reduce share price for reasons unrelated to the current fundamentals of the company, consider it a good time to increase the position. Over the long haul, I believe that due to their diversification and their dividend, this company should have low to moderate risk.
Conclusion and Valuation
So, if you want a small to medium sized, diversified, high-yielding company with 23% annual earnings growth, zero debt, shareholder-friendly management and an earnings multiple in the low double digits, and you can stomach some volatility and an unclear political future, NPK is the way to go. Based on the small size, the growth potential is nearly unlimited, and you get a huge dividend while you wait.
Based on earnings of $9.13/share for 2009 and a reasonable P/E considering the growth and the dividend to be 17 in my opinion, I think shares are reasonably valued as long as they remain under $155. With a margin of safety, and a lower average P/E, I would purchase shares as long as they remain under $140.
Full Disclosure: long NPK
You can see my individual holdings here.
What do you think of NPK? Share your thoughts in the comment section below.
At Kerrisdale Capital, we agree with many of the views expressed in this write-up. We’ll be presenting our own analysis in a multi-part series at our blog: http://kerrisdalecap.com/commentary/?page_id=107&pid=128
I totally agree with your analysis – not because after reading it – but because I had did my own analysis and bought the stock, and only saw your blog here which basically parallels my thinking.
I think the shares of NPK are worth $1B (market cap) which a potential to be worth up to $10B over the next 10 years if it keeps its growth record. At $600M today (July 6, 2010), – what a steal!!!
I am in agreement that a $1B market cap would be appropriate for this stock. While it’s a big holding of mine and I expect it to do well over the next several years, one has to be careful. The defense segment of this company is uncertain. When the wars end and the contracts run out, what will happen is unknown. I expect that growth will slow significantly in the coming years. This isn’t so bad, considering that the combined growth rate and dividend is absolutely huge.
I think the price is so low for this stock because a) it’s factoring in a future slow-down and b) the ceo owns a third of the company, which can be unattractive for some institutional investors.
Many thanks for the detailed account of this stock. I have been looking for an attractive small-cap stock to balance out my portfolio, and I am willing to have some moderate risk here as my other holdings are all quite conservative. This looks like a good possibility. There is very little written about this stock elsewhere, but that is good as it pushes me to do my own homework and increases my knowledge.
You are providing a real service here and it is appreciated. Anytime you decided to put your analysis and your observations into a book, I will buy a copy.
No problem Tim. Thanks for the continued readership.
The biggest risk I can see here is the defense part of it, as I think that will eventually wind down. That is what is keeping the price down in my opinion, as people are factoring that in to the current price.
This was my first stock analysis report on this site, so it’s a bit less refined than my other ones. I plan on writing an updated version next year after they announce their special dividend.
I read about this company some time ago in an article by one marylin cohen of envision capital. Love it. Love the dividends. Love the very modest offices they ha ve. Marty
Latest dividend is for a total of $8.25 per share.
I’m looking greatly forward to your updated version of the analysis on NPK. I was wondering what you thought about the earnings report recently released and this company going forward. It has been on my watch list ever since I first read your analysis and I still haven’t pulled the trigger yet. Anxiously awaiting your thoughts. Thanks!
I’ve already written much of the updated NPK analysis. I’m waiting for the 2010 annual report to be released later this month so that I can thoroughly update myself and provide my best analysis possible.
The short summary is basically that, although growth has slowed during these times, the extremely strong financial position, diversified business, and large dividend, combined with a modest valuation, continues to make the stock attractive to me. I have a large position in it, and am still a buyer. It is, however, quite volatile, and has a rather odd risk profile, with large elements of both safety and risk (small appliances and diapers vs. military contracts).
Thanks! I agree with the odd risk profile. This is one company on the top of my watch list and with the recent weakness due to slowing growth, it may be a great time to buy in.
On a separate note, it was just today that I was browsing through a catalog I received at work where we can spend “points” we earn for certain milestones or achieving performance based goals. Almost all of the small appliances available for “purchase” were made by NPK. Just an interesting note. Thanks again!