Pitney Bowes: Is The 7.8% Yield Really Sustainable?

| About: Pitney Bowes (PBI)

The typical blue chip stock with a 20-year plus history of dividend increases currently yields 2.5% to 3.0%, maybe 4% to 5% for a slow growth utility company. Pitney Bowes (NYSE:PBI) has a 29-year history of steady dividend increases and the company is not in one of those offshoot sectors of the market where high yields prevail. Yet the current dividend yield for Pitney Bowes is 7.8%. A yield this high on a dividend paying corporation is a good indicator the market thinks the quarterly payout is more likely to be reduced than continued or increased.

Pitney Bowes is probably best known for selling and leasing mail equipment such as postage meters and sorters. Over the years, the company has expanded its product and service offering to provide a broader selection of communications services to its customers, such as communications management on all levels with the customer's customers. However, a large portion of Pitney Bowes' business is still tied to the paper mail system. The stock pages list companies like Xerox (NYSE:XRX) as a competitor, but the real competition is online companies providing email marketing and fulfillment services, staying away from the Postal Service.

Pitney Bowes CEO Murray D. Martin noted in the 2011 third quarter press release "that some of the conflicting perceptions and media reports about the mailing industry are having an adverse impact on parts of the business." A record of steadily declining sales result could probably be viewed as an adverse impact.

The revenue and profits for Pitney Bowes peaked in 2008 with sales of $6.3 billion and adjusted earnings per share of $2.78 for the year. Both have declined steadily since that year and the company is forecast to earn $2.25 in 2011 on revenue of $5.32 billion. For the first three quarters of the year the numbers were adjusted earnings of $1.73 per share on sales of $3.9 billion. The Wall Street consensus estimate for the 2011 fourth quarter is earnings of 60 cents per share, down from 66 cents a year earlier.

The Pitney Bowes share price peaked at about $48 in early 2007 and traded in the high $40s until falling of a cliff near the end of that year. The 2008 into 2009 bear market helped push the stock further down with the price hitting $18 at the bottom. Unlike most of the rest of the stock universe, the Pitney Bowes value did not recover over the rest of 2009. Pitney Bowes has been a $19 stock - plus or minus 50 cents - for the last three years. With steadily declining revenue and earnings, there have been no catalysts for the market to bid up the shares. Probably the only factor keeping the stock from falling further is the dividend.

In 2007, the company's quarterly dividend rate was 33 cents per share. It has increased each year and in 2011, the company paid 37 cents quarterly. The increase from 2010 to 2011 was only one-half cent per quarter. With net income still around 60 cents per share quarterly, Pitney Bowes has plenty of room to support the current dividend rate, or even increase it again in 2012. For the 2011 third quarter, $75 million was paid in dividends and the company reported free cash flow of $250 million - plenty of cushion.

As an investment, shares of Pitney Bowes have few positive traits outside of the high dividend yield. The company appears to be working hard to expand those revenue streams not associated with stamping postage onto business mail. Recent results show a slowing of the rate of decline in sales, but not yet a leveling or turn upwards.

Even considering the high yield, investors can most likely find better prospects for high yield stocks with potential for revenue or earnings growth. Pitney Bowes may be a candidate for traders using covered call or dividend capture strategies. The steady share price would give the trader better data for picking entry and exit points. The biggest risk for this type of trading is if one day the company comes out and reduces the dividend, blowing up the strategy and dumping a big loss into the trader's account.

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