Pitney Bowes: A Very Attractive Yield and a Promising Future

Sep. 8.10 | About: Pitney Bowes (PBI)

Pitney Bowes (NYSE:PBI) is a Dividend Aristocrat with the highest yield at 7.3% and 4th highest yield in the S&P 500, so high it approximates yields on junk bonds. It became a Dividend Aristocrat 3 years ago but has only been lifting the annual dividend 2¢ or 4¢ annually in the last decade, reflecting a period of flattish earnings.

PBI is well known for providing mail services (both incoming and outgoing) to businesses and has been hurt by substitution of email and computer related services for traditional mail business along with corporate budget cutbacks in the recession. PBI provides software, hardware and services that integrate physical and digital communications to make customers more productive, helping them grow their businesses. PBI works with leading companies, such as Hewlett-Packard (NYSE:HPQ) and Kodak (EK), to help companies reduce paper volumes and improve productivity. Last year PBI announced a new distribution agreement with Digital China for bringing mailing solutions to businesses though more than 5000 resellers in 600 cities in China (after signing similar agreements in Japan and India).

In 2009, sales dropped 11% to $5.6 billion and EPS fell to the low $2 area. Finances are strong, good cash flow has allowed PBI to acquire treasury stock, increase the dividend annually and last year reduce long term debt $250 million. The dividend will probably be increased 2¢ next year to continue as a Dividend Aristocrat. A more important metric is growing EPS from the $2 area (after the 2009 recession hurt them badly) to $3 for more substantial dividend increases.

After a disappointing Q2, 2010 results were guided lower. The global economy and business environment have not stabilized as quickly as the company anticipated and PBI does not expect business to improve as much as it did earlier in the year. 2010 revenue should be flat to 3% lower (on a constant currency basis) versus last year and adjusted EPS is expected to be $2.10-2.30 while GAAP earnings should be between $1.49-1.85 (the bulk of the difference is due to a one time restructuring and asset impairments recognized in Q2). But cash flow guidance was increased $50 million to $7-800 million in 2010. The company is optimistic about long term growth and cash flow should continue strong. PBI is forecasting revenues will grow 2-5% annually (2009 to 2013) and EBIT is forecasted to grow 6-8% annually. Applying the latter rate to adjusted EPS of $2.20 in 2010, would bring $2.75 EPS in 2013 (assuming the goals are met).

This is a stock for brave investors who are not weak of heart. The high yield of PBI is tempting at a time when 3-4% yields are considered "good" (compared with low rates on Treasuries and other investments). EPS above $2 supports a growing dividend even if it's only at a nominal rate. But the company is struggling to get its feet planted to grow earnings.

In this decade the stock traded mostly in the 30s and even 40s offering yields around 4%, After the recession hit, it has been wallowing in the low 20s. Believers in management will collect dividends while patiently waiting for an improving global economy to lift earnings.

Disclosure: Long PBI