In this low-rate environment, many investors are basing their decisions on yield alone. This could prove to be dangerous as there are many stocks that offer extremely high yields, but their performance over the years has been anything but spectacular. The total return for many stocks that offer extremely high yields has been negative for the past 3-4 years. In choosing a company one should look at the robustness of the company, the dividend growth rate, the sustainability of the dividend and the company's dividend history. Pitney Bowes (NYSE:PBI) is one of the few dividend champions that have performed rather poorly over the past few years, but the outlook appears to be changing going forward. It put in a double bottom formation this September and has been trending higher since then. It also sports a relatively low forward P/E of 6.91, and it sports a low payout ratio of 43%. We are going to examine Pitney Bowes from a technical and fundamental perspective.
Pitney Bowes was put through the following screen and it met and exceeded all the listed requirements.
- Paying dividends for at least 10 years
- Net income should be trending upwards for the past 3 years
- Cash flow per share should be trending upwards for the past 3 years
- A dividend yield of 9 % or higher
- Annual EPS before NRI should be trending upwards for the past 3 years
- Consecutively increased the dividend for 15 years or more.
- Interest coverage ratio of 4.5 or higher
Points of interest
The percentage short of float stands at 32%. This is a very high number and makes this stock a great candidate for a short squeeze. Given that the stock has taken such a beating, the odds of the stock trading higher over the next 3-6 months are probably higher than it crashing.
They have seen a cluster of insider purchases in May and the average price paid per transaction ranged from 13.51-14.52. The stock is currently trading at $13.81 so this means you have a chance to get in at better price than the insiders. The full list of transactions can be accessed here.
The stock completed a nice double bottom formation on the 8th of August. Even though it traded as low as $12.64 it managed to end the day off its lows and closed at $12.94. What was even more bullish was that on the following day the stock recouped all its losses and tested the $14.00 ranges a few days later. The stock is currently range bound and building up momentum for a breakout. It will most likely test $13.00, which corresponds to the - 2 standard deviation Bollinger bands. Usually the stock tends to rally after testing these bands. It has done this 3 times since May of this year.
A weekly close above $16.00 will be a very bullish development and could result in a test of the $18.50-$19.00 ranges. However, a failure to hold past $15.00 on the next breakout could result in a test of its lows with the possibility of it trading to a series of new 52-week lows. We could consider opening a position in the stock in the $13.00-$13.10 ranges and placing a stop at $12.00. Once it trades to and past $15.25, we would raise the stop to $13.00. This way if the stock fails to hold above $15.00, and it breaks down you won't have to take on unnecessary losses.
The detailed fundamental data provided below allows you to quickly decide if this stock meets with your investment criteria. The key areas to focus on are net income, cash flow, earnings per share, current ratio, and interest coverage.
In the key areas we can see that the outlook has been improving. Net income, cash flow per share and annual EPS has increased for the past 3 years. It sports a low payout ratio of 43% and splendid yield of 11.2%.
Company: Pitney Bowes Inc (PBI)
- Net Income ($mil) 12/2011 = 617
- Net Income ($mil) 12/2010 = 292
- Net Income ($mil) 12/2009 = 423
- Cash Flow ($/share) 12/2011 = 4.31
- Cash Flow ($/share) 12/2010 = 3.76
- Cash Flow ($/share) 12/2009 = 3.92
- Annual EPS before NRI 12/2009 = 2.28
- Annual EPS before NRI 12/2010 = 2.23
- Annual EPS before NRI 12/2011 = 2.26
When it comes to investing in dividend stocks, one should pay attention to the dividend growth. In this case the stock has been increasing its dividend payments steadily over the years.
- Dividend Yield = 11.2
- Dividend Yield 5 Year Average = 5.8
- Dividend 5 year Growth = 2.5
- Payout Ratio = 0.43
- Payout Ratio 5 Year Average = 0.58
- Current Ratio = 1.00
- Current Ratio 5 Year Average = 1.09
- Quick Ratio = 0.9
- Cash Ratio = 0.36
- Interest Coverage = 4.7
- Consecutive dividend increases = 31 years
This stock falls under the "dividend champions" category. It has consecutively raised dividends for 31 years. Over the past few years, the stock has taken a serious beating and appears to have put in a bottom. The extremely high short percentage of float makes it a great candidate for a short squeeze. Any positive news could have a big impact on the price of its shares. Analysts have a mean price target of $15.50 and a high target of $19.00. If the stock manages to close above $16.00 on a weekly basis, it should be in a position to trade to $19.00.
As it is still generating plenty of cash, there is no threat of the dividend being cut in the near future. With a payout ratio of 43%, it still has plenty of room to raise its dividend. Investors willing to take on some risk now could be rewarded in the not too distant future.
EPS and EPS surprise charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Dividend history sourced from dividata.com.
It is imperative that you do your due diligence and then determine if the above play meets with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: This article was prepared for Tactical Investor by one of our analysts. We have not received any compensation for expressing the recommendations in this article. We have no business relationships with any of the companies mentioned in this article.