Pitney Bowes: Overvalued With A High Yield

|
 |  About: Pitney Bowes Inc. (PBI)
by: Bennington Investment Ideas

Pitney Bowes Inc. (NYSE: PBI) provides equipment and mail solutions globally to both small and medium businesses, as well as large enterprises. Its equipment offerings include high speed sorting and printing systems. PBI also offers software, services, and facilities managements services. PBI markets its products and services through a variety of channels,including direct sales, telemarketing, distributors and dealers. PBI operates in two major segments: SMB and Enterprise. The company was founded in 1920 and is headquartered in Stamford, Connecticut.

PBI had about $5.4 billion in revenue in 2010. Revenue has declined in each of the past 2 years after slight growth from 2007 to 2008. PBI has a market capitalization of $3.9 billion and an enterprise value of $7.5 billion, suggesting significant leverage.

PBI's estimated forward dividend yield is 7.8% based upon a closing price of $19.17 and the author's projected annual dividend of $1.495. The following table shows the estimated forward quarterly dividends as well as the recent historical quarterly dividends.

Historical and Projected Dividends

Type Ex-Dividend Date Quarterly Dividend ($ per share) Change on prior year
Projected 8/10/2012 0.375 1.4%
Projected 5/11/2012 0.375 1.4%
Projected 2/16/2012 0.375 1.4%
Projected 11/17/2011 0.370 1.4%
Historical 8/10/2011 0.370 1.4%
Historical 5/11/2011 0.370 1.4%
Historical 2/16/2011 0.370 1.4%
Historical 11/17/2010 0.365 1.4%
Historical 8/11/2010 0.365 1.4%
Historical 5/12/2010 0.365 1.4%
Historical 2/17/2010 0.365 1.4%
Historical 11/18/2009 $ 0.360 2.9%
Historical 8/12/2009 0.360 2.9%
Historical 5/13/2009 0.360 2.9%
Historical 2/18/2009 0.360 2.9%
Historical 11/19/2008 0.350 186.9%
Historical 8/13/2008 0.350 6.1%
Historical 5/14/2008 0.350 6.1%
Historical 2/13/2008 0.350 6.1%
Historical 11/19/2007 0.122 -61.9%
Historical 8/15/2007 0.330 3.1%
Historical 5/16/2007 0.330 3.1%
Historical 2/14/2007 0.330 3.1%
Historical 11/15/2006 0.320 3.2%
Historical 8/16/2006 0.320 3.2%
Historical 5/17/2006 0.320 3.2%
Click to enlarge

Source: Author estimates, Yahoo!Finance

The above table shows a worrisome trend of declining dividend growth. Furthermore, closer inspection reveals that PBI is driving dividend growth by boosting the payout ratio rather than growing the underlining earnings. This type of practice is not sustainable in the long term. For example, the most recent quarter ($0.37 dividend) was made with a payout ratio of 88%, while in Q4 2010 ($0.365 dividend), the payout ratio was just 75%. The following graph shows the historical trailing twelve month yield and spread to the 10-year Treasury bond.

Created from data from Yahoo!Finance

The next graph shows the normalized performance of the stock price, the dividend, and the trailing dividend yield.

Created from data from Yahoo!Finance

The above chart shows that PBI has continued to decline in value despite increasing dividends suggesting investors are very concerned about is future growth and margin prospects. The big jump in yield is being driven by a declining stock price, not dividend growth.

Dividend Discount Model Suggests Slight Overvaluation

The first step to using the dividend discount model is to calculate an equity hurdle rate with the Capital Asset Pricing Model. PBI has a beta of 1.12 and with the risk free rate at a very low 2% this gives the discount rate to be a 9.8%. As noted above the forward dividend is approximately $1.495. Applying a long term growth rate of 1.5% gives an estimated price of $17.93 for PBI. This is approximately a 7% discount to the current price of $19.17. However, as with any dividend discount model, the result is highly sensitive to growth rate and equity hurdle rate assumptions. Furthermore, the 1.5% growth rate might be generous given PBI's business. As companies migrate away from paper mail, PBI will face additional challenges.

DDM Sensitivities

Sensitivity Equity Hurdle Rate
Growth Rate 8.8% 9.8% 10.8% 11.8%
-1.0% 15.20 13.80 12.63 11.65
-0.5% 16.01 14.46 13.19 12.12
0.0% 16.92 15.20 13.80 12.63
1.0% 19.08 16.92 15.20 13.80
1.5% 20.38 17.93 16.01 14.46
2.0% 21.87 19.08 16.92 15.20
Click to enlarge

Source: Author calculations

This is one stock that despite a high dividend yield, I would probably not analyze further. Furthermore, PBI has a significant short interest suggesting there are others who think PBI has a poor future ahead. I would not be surprised by a future dividend cut; however, the current dividend trend still appears sustainable.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.