On the surface, Pitney Bowes, Inc. (PBI) may look very attractive to some long-term value investors, returning a dividend yield of roughly 11% at a price of $13.68 at the time of this article. But savvy investors will stay away. Here's why:
1. Steadily declining revenues and gradually rising costs. A brief study of the latest 10-K shows PBI's revenue has been steadily declining, year-over-year, at least since 2008. In the last five years, revenue has fallen by -19.2%, from $6.07M to $4.90M. In fact, revenues from every one of the seven business segments the company tracks declined in 2012. Only one of the seven segments grew the previous year in 2011, the Software segment. After growing in 2011, even the Software segment declined in 2012, shrinking by -3%. Conversely, costs are slowly increasing at PBI growing from 48% of revenue to 50% over the last three years.
2. EPS increased only through share buybacks. Of course with declining revenues and gradually rising costs, the only way to maintain or increase EPS is through share buybacks, which is what PBI has done in recent years. The calculated 5-year EPS growth rate is 5.80%, but it is important to realize this is not organic growth, as demonstrated in bullet point 1, it can only be the result of accounting for fewer shares outstanding each year.
3. Steadily declining share price. Although PBI is actually up year-to-date, the overall long-term price trend has been negative since early 2011 when it was trading north of $25. It has lost nearly half of its value since that time. If not for the sharp decline in share price, the dividend yield wouldn't be such a gaudy 11%.
4. Poor industry outlook and increasing competition. The vast majority of PBI's revenues result from both their Domestic Mailing and International Mailing services. Unfortunately, just like the U.S. Postal Service, PBI will have to overcome a general long-term trend of both consumers and businesses sending less and less traditional (paper) mail each year. Making matters worse, each year there is increased competition from older direct competitors, as well as new competitors who are striving to convert most traditionally mailed communications to digital formats, including web-based platforms that do not require specialized equipment leases common at PBI.
Sure, an 11% dividend yield is great, but how long can it possibly last? The way I see it, not long enough to warrant the risk to your principle amid such uncertainty.