Pitney Bowes (PBI) provides communication (digital and physical) services, equipment and software to businesses. Its specializes in mail and document management systems. The company's dividend yield of 11.37% is what attracts investors to PBI. The payout ratio is a high 74%. This article focuses mainly on PBI's dividend and future outlook. The dividend is sustainable at present, and is a good investment for income investors. Insider buying and an expected favorable shift in the revenue mix makes us bullish on the stock.
2Q2012 EPS exceeded analyst expectations, while the revenue was inline. The company has a history of earnings surprises, although the percentage of surprises has been falling. In 2Q2012, the company reported EPS of $0.5, on the back of revenues of $1.25 billion. Analysts were expecting EPS of $0.49 from revenues of $1.2 billion. In 2Q2011, the company had reported EPS of $0.52 and revenues of $1.31 billion.
For 3Q2012, analysts are expecting EPS of $0.49, down from last year's $0.69. The expectations for revenues are $1.3 billion, same as last year.
For the full year, the consensus is EPS of $2.02 (11% lower than last year), and revenues of $5.1 billion (~4% lower than last year). Thus, analysts expect a future decline in both revenues and sales. The company guided to a range of $1.95-2.15/share, so there is room for a significant earnings surprise.
According to the company, it aims to leverage its physical communication strength to expand the digital and hybrid communications offerings. The company does not expect growth in digital products to contribute significantly to 2012 revenues. In the future, it expects a shift towards enterprise-related products and solutions generating the bulk of revenues. At present, this segment brings in 50% of revenues, and has shown an increase of 11% YoY in EBIT in 2Q2012, as compared to a decline in EBIT of 6% for the small and medium business solutions segment. Thus, a shift in the revenue mix towards enterprise business solutions may help in improving the company's bottom line.
The economic situation, especially in Europe, continues to hurt the company's sales. Results are also impacted by foreign currency conversion.
The company's shares are so far up 3.15% in today's trading, due to obtaining new contracts. Glen Raven selected PBI's SendSuite Live as its logistics management solution for managing around 400,000 parcel shipments per year. Also, Wipro Limited (WIT) is going to use PBI's pbSecure to create, authenticate and secure its employee communication. This fraud protection solution was recently launched for the growing markets region (Asia Pacific).
The company's dividend yield of 11.37% is sustainable given the free cash flow yield (trailing twelve months) of 14.4%. According to the company's raised guidance, free cash flows will be $750- 850 million this year. The dividend last year was $300 million. The company has been paying dividends for 30 years; the 5-year growth rate for dividends is 2.95%. PBI has operating cash flows of $840 million (trailing twelve months) and cash and cash equivalents of $538 million. It also has preferred stocks outstanding with cumulative dividends of 6.125%. These preferred stocks are callable after 2016.
The cash dividend coverage ratio (operating cash flows-preferred dividend/ordinary dividend) is approximately 2.7x, showing that operating cash flows can easily cover dividends. Even if a more conservative investor subtracts a CAPEX of $157 million over the last year from OCF, the dividend coverage ratio is 2.2x. The company also has $50 million remaining in its repurchase program as at the end of the last quarter.
The long term debt-to-equity ratio is 4,000%, but the interest coverage ratio is a safe at 6 times, showing that earnings can easily cover interest payments. The company has slightly decreased its long term debt level since last year ($3.3 billion in the last quarter as compared to $3.7 billion after the first six months in 2011). In the last quarter, the company redeemed notes worth $400 million that were due in October, 2012.
The company has a commercial paper program that it can draw on for liquidity. There were no outstanding borrowings from commercial paper as at the end of last quarter.
The stock is down 30% in the last year. The forward P/E is almost 7x. Most of its competitors, like Neopost S.A., are not listed in the U.S.
Xerox Corp (XRX), a peer in the business equipment industry, has a forward P/E of 6x. Neopost is quoted on the Paris Stock Exchange and has a P/E ratio of 9x. It is the second largest manufacturer of communications equipment and systems after Pitney Bowes, and has a dividend yield of 9.3%.
At forward P/E of 7x and 2013 EPS estimates of $1.95, the price comes out to be $13.7. The consensus target price is $15.5. There isn't a significant upside according to these figures. The short ratio is 11 days. However, insider buying tells a different, albeit, positive story. Insiders, including the CEO, have bought shares at prices of $13.51-$13.71, showing that they are confident about the company's prospects.
We recommend buying PBI, mainly based on the impressive sustainable dividend yield, and also because a turnaround can be expected in the future, based on shifting of the revenue mix and the economy getting better. We advise income investors to be mindful of future free cash flows, as they are directly related to dividend sustainability.