Pitney Bowes (PBI) is world's largest producer of postage meters. It offers financing for these meters as well as other mailing equipment and shipping and weighing systems it sells. PBI also offers online postage services; facilities management services; develops software to create mailers; and manages shipping, transportation, and logistics for government agencies and corporations.
The majority of PBI's revenue is products and services for the delivery of physical mail (fliers, postage, junk mail, etc). As more mail is digitized, mail volumes are steadily decreasing. Management is attempting to transform the company to a cloud-based, service-oriented company, but the results have yet to offset declining revenue in the physical mail business.
The Enticing Dividend and PE Ratio
PBI's latest dividend of $0.375 was paid out on March 12, 2013. PBI has consistently paid dividends for 30 years and the current dividend yield of 10.4% is enticing to investors looking for yields.
PBI's price earnings (PE) ratio of 6.6 and forward price earnings ratio of 7.53 also appear to make the stock a bargain.
Why the Dividend is Unsustainable
The following are some signs that the current dividend is unsustainable:
- The dividend was not increased for 2013
- The dividend was not increased this year - the first time since 2007.
- High dividend payout ratio
- The payout ratio is at 69%.
- High payout ratio hinders ability to make potential acquisitions or pay down the $4 billion in long-term debt.
- Slowing revenues from continuing operations
- Slowing cash flows from operations
- No stock buybacks in 2012
- High dividend payout ratio and shrinking revenues hinder share repurchases.
- $4 billion in long-term debt
- Interest expense will be a larger percentage of costs as revenue slows.
- Bond interest checks will be sent out before dividend checks.
- Forward PE ratio is higher
- Increasing PE ratio that may increase further as estimates are revised downward when economic conditions deteriorate further.
- Large short interest
- As a percentage of shares outstanding, the current short interest in PBI is 29.57%.
- Inventories are increasing even as revenues slow
Investors should avoid the enticing dividend yield of PBI. The market for mail processing equipment and mail services is shrinking globally and the company's recent acquisitions have not reversed this trend.