Don’t be Fooled by this Double Digit Dividend Aristocrat

Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Pitney Bowes (NYSE: PBI) is a “Dividend Aristocrat,” which means it has increased its dividend payout for 25 consecutive years.  Unfortunately, there are many reasons why long term income investors seeking rising dividends should not expect this business supply company to continue these increases into the future.

A major factor is that paying the dividend consumes way too much of Pitney Bowes' earnings.  As the table below shows, the dividend payout ratio for Pitney Bowes is much higher than its industry average.  It is also higher than the dividend payout ratio for other Dividend Aristocrats such as Walgreen (NYSE: WAG), Sherwin Williams (NYSE: SHW), Sysco (NYSE: SYY), and Abbot Laboratories (NYSE: ABT).

Metric

Pitney Bowes

Walgreen

Sherwin Williams

Sysco

ABT

Industry Average

Dividend Yield

12.20%

2.70%

1.00%

3.50%

1.70%

1.10%

Dividend Payout Ratio

82.09%

45.66%

27.66%

57.21%

54.00%

44.00%

Source: The Motley Fools CAPS, Finviz

In addition to not having the present earnings flow to sustain its double digit dividend yield, the future cash flow for Pitney Bowes should not be able to support the increases necessary to raise it yearly to maintain Dividend Aristocrat status.  Earnings-per-share growth for Pitney Bowes over the last 5 years is down by 7.14%.  For the next year, EPS growth is projected to fall by another 4.02%.  Over the next five years, it is expected to fall by an average of 1.50%.  

By contrast, EPS growth for Walgreen, the drug store chain, is projected to grow by 13.23% for the next five years.  Over that same period, Sherwin Williams, the paint and chemicals company, is expected to enjoy EPS growth of 17.30%.  For Sysco, five-year EPS growth is estimated by the analyst community to increase 6.97% for the food supplier.  Big Pharma’s Abbot Laboratories should see 4.97% growth in EPS for the next half decade.  With this EPS growth, these Dividend Aristocrats can afford to responsibly increase their dividend payments annually.   

It is a different story for Pitney Bowes, as competition from the Internet has been crippling for its sector.  Sales growth and EPS growth are both down for the last five years, and for the most recent quarter sales growth is off by 6.47%.  Over the same period, EPS growth is down by 31.67%.

Other financial indicators are just as unsettling for those expecting the dividend to increase annually.  The price-to-free cash flow ratio is 16.32.  To put this in perspective, the share price is down by 30.49% for the last year.  Without this plunge, the anemic free cash flow would be even more concerning.

What is truly disturbing is the staggering debt load of Pitney Bowes.  The debt-to-equity ratio is 29.53.  That means it required almost $30 in debt to producer just one dollar in equity. 

Unsurprisingly, there is a high short float of 30.71% for Pitney Bowes.  A short float of 5% is considered to be troubling for a company.  What makes this short float even more compelling as an indicator is that those holding a short position do not collect the dividend, even though they pay for it when going short on a stock.

Pitney Bowes does appeal to value investors with a price-to-earnings ratio of just 6.71 and a price-to-sales ratio of 0.48 (although it appears to be a classic value trap with falling sales and EPS).  But income investors should not succumb to the temptation of this double digit dividend.  There just is not the earnings stream to support such a huge payout to the shareholders.

 


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