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The Motley Fool: Little known Kimball Int. delivers furniture profits

The Motley Fool Take

Sometimes the greatest finds are gems you’ve never heard of before. Kimball International (Nasdaq: KBAL), a manufacturer of office and hospitality furniture that’s sold under the National, Kimball Office and Kimball Hospitality brands, could be just the cheap growth stock you seek.

In Kimball’s last quarterly earnings report, revenue grew by 8 percent, administrative expenses dropped 5 percent and adjusted operating income exploded higher by 145 percent. CEO Bob Schneider attributed much of the success to the company’s employees, as well as new office-furniture innovations, adding that hospitality revenue would have seen a 27 percent increase if not for a large special order that’s being recognized over multiple quarters.

Kimball is benefiting from businesses having relatively easy access to cheap capital, which is allowing them to take on debt and expand. This expansion means new equipment and furnishings. Kimball’s hospitality segment also benefits from Americans having more income at their disposal. Hotels have witnessed a successful rebound from their Great Recession lows, and many are looking to increase their capacity. This bodes well for Kimball.

Although Kimball can be lumped in with a wide swath of cyclical companies dependent on economic growth to drive sales and profits higher, its dividend, which recently yielded 2 percent, $26 million in net cash and growing profit margins make it a promising candidate for investors seeking growth and value.

Ask the Fool

Q: Do companies reduce their dividends? - G.P., Erie, Pennsylvania

A: They aim to never do so, as that would disappoint shareholders and suggest business weakness. Still, sometimes companies do reduce or eliminate dividends. In 2009, when our economy was struggling due to the credit crisis, General Electric slashed its payout by 68 percent. (It has since been hiking it, but it’s not yet back to previous levels.) Today many energy companies are struggling because of the low price of oil. ConocoPhillips recently cut its payout by 66 percent.

Of course, many companies (especially young or fast-growing ones) pay little or no dividend, preferring to reinvest most of their earnings to help themselves grow. For example, Amazon, Facebook, Priceline and Tesla Motors pay no dividend, while FedEx, Humana, Southwest Airlines, Activision Blizzard and Visa pay modest ones.

Including healthy dividend payers in your portfolio is a smart move, though. Between 1930 and 2014, dividends accounted for roughly 40 percent of the total return of the S&P 500 index. Dividend payers tend to hold up better in weak markets, too.

To see a list of dividend-paying stocks we recommend, try our Motley Fool Income Investor newsletter for free at fool.com/shop/newsletters.

Q: What’s the “efficient market theory”? - F.F., Opelika, Alabama

A: It suggests that all available information about a stock is known and factored into its price, so we shouldn’t be able to find undervalued or overvalued stocks. There are strong and weak forms of this theory, and many just dismiss it. It’s not unreasonable to view the market as generally efficient, but with occasional inefficiencies that investors can take advantage of. Learn more in Burton Malkiel’s “A Random Walk Down Wall Street” (W.W. Norton, $20).

My Dumbest Investment

Six years ago I came into some money, smack dab in the middle of the Great Recession. Since the stock market had tanked and my experience had never been good there, I bought two condominiums. It seemed a very secure investment, as I’d always done well in real estate. Maintenance expenses were paid through an assessment, so I wouldn’t have to worry about them, both units were new, and I thought demand would be great.

How wrong I was. The condo owners are at the mercy of the condo association, and there is little one can do about that. The people “managing” the property often don’t seek competitive bids or audit the bills they receive. They don’t always aim to keep expenses down, passing bills along to the condo owners, with the result that the assessment fees keep going up.

Within two years, the fees I paid nearly doubled and the value of my properties fell significantly. I got out as quickly as I could to save what I had left. - J.H., via email

The Fool responds: Many condominium owners are happy, but you’re not alone in your criticisms. Before buying a condo, it’s smart to ask a lot of questions of residents in the complex. Stocks may not have seemed appealing back in 2010, but they’ve rebounded considerably since then. When others have panicked and sold is often a great time to buy.

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