National Presto Industries Inc. (NPK), Stanley Black & Decker, Inc. (SWK): Don’t Forget About Special Dividends

No real competitive advantages

Being so small, Presto doesn’t really have any competitive advantages which give the company an edge. In the absorbent business, Presto competes with behemoth The Procter & Gamble Company (NYSE:PG), which owns the Pampers line of diapers. Presto makes private-label products, which likely undercut the name-brand options om price, but there’s no customer loyalty to speak of. As an investment, The Procter & Gamble Company (NYSE:PG) is certainly a lot safer than Presto, with $83 billion in annual sales and a myriad of well-known brands. The Procter & Gamble Company (NYSE:PG) pays a 3% dividend and offers slow but steady dividend growth, something that can’t be said for Presto.

In the small appliances business, Presto competes with companies like Stanley Black & Decker, Inc. (NYSE:SWK). Stanley Black & Decker, Inc. (NYSE:SWK) may be best known for its tools business, but the company makes all sorts of kitchen appliances as well. The brand name is likely more well known than Presto, and the $10 billion in annual sales dwarfs Presto’s numbers. Stanley Black & Decker, Inc. (NYSE:SWK) pays a 2.5% dividend, and that dividend has grown by about 6% annually over the past decade. Again, compared to Presto, Stanley Black & Decker, Inc. (NYSE:SWK) offers a much more stable investment, although the possible dividend is far lower.

The bottom line

Presto is a hard sell due to tough competition in the company’s industries. Presto’s revenue and profits are volatile, thus making the dividend volatile as well. If the company can maintain its current special dividend, then you’d be getting a 9% yield and buying the stock at about 10 times earnings. But if earnings decline, the dividend, along with the stock price, will dry up pretty fast. There aren’t too many companies which offer 9% yields, especially those which make household products, and if Presto can maintain its profitability, it could make for a very lucrative investment. But unfortunately, that’s a big if.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. The Motley Fool owns shares of National Presto Industries. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Don’t Forget About Special Dividends originally appeared on Fool.com is written by Timothy Green.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.