Monday, September 13, 2010

Pitney Bowes: The Dividend Check is in the Mail

Pitney Bowes: A Very Attractive Yield and a Promising Future

Pitney Bowes (PBI), with a yield of more than 7%, offers investors the fourth highest yield among S&P 500 stocks. At over 7%, the yield is at junk-bond levels. But the company is far more solid than its high yield suggests.

PBI is well known for providing businesses with equipment to handle their mail, both incoming and outgoing. It's true that Pitney Bowes has felt the impact of email and computer-related mail services. The traditional mail business is declining, but is far from disappearing like the Pony Express. Companies are managing their mail more efficiently and they're managing with software, hardware and services from Pitney Bowes.

PBI is working with leading companies, such as Hewlett-Packard (HPQ) and Kodak (EK), to help customers reduce paper volumes and improve productivity. Last year PBI announced a new distribution agreement with Digital China. The new alliance is bringing mailing solutions from PBI to Chinese businesses though more than 5000 resellers in 600 cities in China (after signing similar agreements in Japan and India).

Last year was a down year. Sales dropped 11% to $5.6 billion and EPS fell to the low $2 area. However, the company's balance sheet is strong. Healthy cash flow has allowed PBI to repurchase its stoack and increase the dividend. Last year the company reduced long term debt by $250 million.

After a disappointing Q2, full-year 2010 results were guided lower. The global economy and business environment have not stabilized fast enough for the company to see improved results this year. The company believes 2010 revenue will, at best, match last year's figure. However, analysts have suggested the top line might decline by 3%. Excluding non-recurring items, earnings per-share for the year are estimated at $2.10-2.30, while GAAP earnings should fall between $1.49-1.85 (the bulk of the difference is due to a one time restructuring and asset impairments recognized in Q2).

However, for 2010 cash flow guidance was increased $50 million to $700 million-$800 million. The company is optimistic about long term growth. PBI is forecasting revenues will grow 2-5% annually (2009 to 2013) and Earnings Before Interest and Taxes (EBIT) is forecasted to grow 6-8% annually. If these projections prove accurate then it is likely EPS will rise to $2.75 EPS in 2013.

Nevertheless, this stock, as the high dividend suggests, carries some risks. If the economy remains in a weakened state, the company may decide it must conserve cash, which implies it may cut the dividend. Moreover, it appears that EPS above $2 is the threshold for increasing the dividend. Those earnings may not arrive soon enough.

However, the key to higher growth is likely to be found in opening new markets. Many corporations expect to profit from operations in China and India, which are home to a total of almost 3 billion people, most of whom will send letters through their national Post Offices for a long time before they switch to e-mail.

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