Post Office Follies

For reasons that defy logic and renounce sanity, the government cannot keeps its hands of the business world. Most recently Washingtton became the largest shareholder of General (Government) Motors and believes, against all odds, that investors will buy the government's share of GM for a premium.

Why bother? The money's in getting the government to maintain its hold on the businesses it's in. The Post Office, for example. There's no doubt delivering the mail is profitable -- in the right hands. FedEx, UPS, DHL, Airborne Express and others have proven the point many times. But the government loses a bundle running the Post Office.

Is anyone happy about that? At least one company is: Pitney Bowes. In addition to Pitney Bowes there are many other businesses that profit in less obvious ways. The Post Office rents some of its facilities. Landlords know the P.O is good for the rent. Moreover, the postal service buys a lot of vehicles and those vehicles use a lot of fuel.

As they say, Neither Rain Nor Sleet Nor Gloom of Night Will Keep the Postal Service From Losing Billions. Meanwhile Obama says pumping money into the economy is the way to stimulate it and modernize it. Through the Post Office taxpayers are pumping billions of dollars into the economy. Paying more and getting less. Isn't the lesson of the Post Office enough to convince him that money is not the answer. Is he too blind to see that competition is the force that's needed?

Yes. He's too blind to see.

Post Office Shows Where U.S. Is Headed

To understand where the advocates of big government will take this country, look at the U.S. Postal Service.

Start with the fact the Postal Service is a great jobs machine, employing 712,000 people at an average annual compensation, including wages and benefits, of $83,000.

Those hefty pay checks are a great source of political contributions for Democrats. In 2010, almost 90 percent of the approximately $4 million contributed to campaigns by postal unions went to Democrats. Take a guess where much of the opposition to reform comes from.

But high-priced labor, which accounts each year for about 80 percent of costs, leads to high-priced mail services, and even higher costs for taxpayers. Over the past 10 years, the price of a stamp has risen from 33 cents to 44 cents, exceeding the inflation rate at a time when computerization should have been leading to big cost savings. Even so the Postal Service lost about $6 billion this year and by its own projections it will drop a cool $238 billion over the next decade.

By 2020, the last year in the projections, the Postal Service will be losing $33 billion annually.

If its losses level off and it continues to lose that much each year, the Postal Service will lose $550 billion from 2010 to 2030. If the growth rate of losses projected over the next decade continues until 2030, it will lose more than $1 trillion in that span. The fiscal black hole that the Postal Service has become is no small potatoes, even in government terms.

Broken Model

In April 2010, the Government Accountability Office released a report that analyzed the operations of the Postal Service and concluded that, “USPS’s business model is not viable due to USPS’s inability to reduce costs sufficiently.”

A 2007 GAO study looked at the Postal Service’s use of facilities, and concluded that, “A 2005 contractor assessment of 651 randomly selected postal facilities revealed that two-thirds of these facilities were in less than “acceptable” condition, including 22 percent that were rated “poor.” Inspection of one facility in Dallas led the inspector to recommend that the building be immediately evacuated.

The decaying buildings provide a handy visual clue to the quality of service. Unfortunately, we don’t know how bad the service is, because the Postal Service collects data on its own service quality, but it refuses to make the data public. Isn’t it nice that your tax dollars pay for data that you’re not allowed to see?

It’s in the Mail

The Postal Service’s ability to lose mail is, of course, legendary. Here is an example of how bad it has become: last week the American Postal Workers Union had to postpone their national election of officers because so many of the ballots were lost in the mail.

The Postal Service is able to survive because U.S. law protects it with not one but two monopolies.

First, it is the only entity that is allowed to deliver many types of mail. There are a few exceptions that have allowed FedEx Corp., United Parcel Service Inc. and bicycle carriers to flourish, but low- cost, high-volume letters are walled off from competition from other providers.

Second, the Postal Service actually has a legal monopoly over your privately owned mailbox. You bought it, but if another company starts to use it as a receptacle for letters, they are violating federal law.

Legal Cover

This organization has withstood political pressure for some time, in part because Postal Service advocates have argued that the monopoly is necessary because of the national objective of providing universal service. If we want to have everyone on the postal grid, they say, then the grid will be impossible to support with private markets.

This argument, of course, is specious. It would be trivial to fully privatize postal delivery with guaranteed universal service. We need only write regulations that require firms that compete for postal business to provide universal service.

The Democrats will never let us do that, of course. The political might of the public employee unions is just too great.

As with the stimulus, the American left finds itself far to the left of even the statist Europeans. Countless other nations have recognized the possible large benefits from privatizing the postal business. In 2005, Cornell University economist R. Richard Geddes reviewed the academic literature on postal reform for the distinguished Journal of Economic Perspectives, and reported that “comprehensive postal reform has been ongoing in other countries for decades.” Countries that have introduced major reforms include Germany and Sweden.

A U.S. Gain

Reforms tended to have, he reported, three characteristics. First, they would “corporatize” or privatize postal operations. Second, reforms have tended to reduce delivery monopolies. And third, regulators have guaranteed the continuation of universal service.

The possibility for real gain in the U.S. is enormous. The Postal Service owns or operates 33,000 facilities nationwide, and owns 219,000 vehicles. If we were to auction it off to private investors, the bids would likely be enormous. FedEx and UPS, for example, have a combined market capitalization of almost $100 billion. Given that, how much might a private bidder offer for the right to start a business with the Postal Service’s footprint? The $100 billion mark might be a good first guess.

Which means we have two paths to chose between. On one, we continue to operate the Postal Service, and watch it lose hundreds of billions of dollars. Along the other, we sell it to a private contractor, avoid those losses while cashing a nice big check.

If the Tea Party activists want to fix the country, they should start by privatizing the Postal Service. If we can’t fix that, then it is hard to imagine how we will ever fix anything.

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.

As the Post Office goes, so will go ObamaCare

The government runs the mail business in ways similar to the ways it will run more and more of the healthcare business. We can see where the encroaching government management will take us. The future of healthcare is unaffordable if we follow the path set by Obama and his spendthrift idealists. However, the news about the Post Office is good news for those who own stock in Pitney Bowes.

GAO: Postal Service business 'not viable'

Happy Monday! The U.S. Postal Service's current business model "is not viable" and the mail agency should make deeper job and wage cuts, hire more part-time staff and consider outsourcing operations, according to a draft of a government audit acquired by The Federal Eye.

Auditors also urge Congress to remove restrictions on the Postal Service's ability to cut Saturday mail delivery and close post offices, according to the report, which offers recommendations similar to the USPS's own proposed 10-year business plan.

Lawmakers requested the Government Accountability Office report, set for a Monday release, as they prepare to consider the USPS plan, which was introduced last month. The proposals call for an end to six-day delivery and ask Congress to give the mail agency the ability to raise prices beyond the rate of inflation and close post offices if necessary.

The report's conclusions pleased top postal officials who are gathered this week in Nashville for the annual National Postal Forum, a convention for the mail agency's largest customers.

Postmaster General John E. Potter said Sunday he was pleased with the GAO's general conclusions, but concerned with suggestions in the report that further study of the issue is required.

"We've studied this significantly, the time for study is over, now's the time for action," he said.

Potter and his colleagues estimate the Postal Service will lose a record $7 billion in the fiscal year that ends in September and could lose at least $238 billion in the next decade if Congress fails to act.

Auditors appeared to push beyond the USPS proposal. "If no action is taken, risks of larger USPS losses, rate increases and taxpayer subsides will increase," GAO said.

The Postal Service should provide more lucrative incentive packages to potential retirees to try to accelerate attrition, auditors said. They also recommended USPS consider outsourcing more delivery routes and mail services to contractors and seek concessions on wage and benefits from its labor unions during negotiations later this year.

Lawmakers also should consider establishing a panel similar to the Base Realignment and Closure Commission to independently recommend changes, the report said. Auditors suggested that more details are needed about potential delivery cuts and post office closures.

Most lawmakers and regulators have reacted tepidly to proposed changes. Potter's meetings in Nashville will be mostly with customers who could suffer from proposed cuts and price increases.

GAO concluded that the recession served as the "tipping point" that accelerated a shift away from traditional snail mail for most of the Postal Service's biggest customers, including insurance and banking companies.

Sen. Tom Carper (D-Del.), who will lead postal reform efforts in the Senate, said that if GAO's conclusions are correct, "it is imperative that Congress, postal management, postal employees, customers and other stakeholders give up on old fights and biases and work together to cut the Postal Service's costs and adjust its operations to meet a changing environment."