An 11% Yield That's Going To Be Around For A While
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sometimes investors get so enamored with the idea that an industry is dying out, that they forget to check on how long the companies in that industry can survive. I've written before about this phenomenon with Pitney Bowes (NYSE: PBI). The company has essentially been left as the last man standing in the home and business postage market. While customers can print shipping labels from the U.S. Postal Service web site and have multiple other options, no company has the experience supplying shipping and postage solutions like this 90+ year old company. While the industry is clearly hurting, and physical mail is certainly on the decline, to assume that Pitney Bowes is in trouble misses the mark by a long shot. With the company's most recent earnings report, investors get another chance to look under the hood of this dividend aristocrat.
I'll admit up front that the numbers don't look great. Overall revenue was down 5% and EPS was essentially flat year-over-year. By far the company's largest and most profitable division is their SMB Solutions group, which is comprised of their global mailing operations. This is the old-school traditional postage metering and mailing operations that Pitney Bowes is known for. This unit is actually comprised of three sub-sections North America Mailing, International Mailing, and Enterprise Business Solutions.
It's not a surprise that North America mailing saw a drop in both revenues and profits, but earnings before interest and taxes actually was only down 5%. The International Mailing division surprisingly saw a 1% increase in revenue if you exclude exchange adjustments, but a difficult operating environment caused earnings to drop 19%. Where Enterprise Business Solutions is concerned, while revenues were down 1% excluding currency, earnings actually increased 11% and now represent about 24% of total income for the overall SMB Solutions division. This is good news for Pitney Bowes investors as mailing revenues will likely decline into the future, so the company needs Enterprise Solutions to step up and take the reigns.
The biggest challenge for Pitney Bowes in growing their Enterprise Business Solutions group is this unit is in head-to-head competition with companies like Xerox (NYSE: XRX), Hewlett-Packard (NYSE: HPQ), and Oracle (NASDAQ: ORCL). All three of these companies offer solutions to businesses of all sizes to try and help them cut costs, reach their customers more effectively, and increase sales. Of these three competitors, two seem to be in similar situations to Pitney Bowes in the sense that they are fighting to regain lost momentum. Xerox is expected to only see 1% average revenue growth in the next couple of years, while Hewlett-Packard is actually expected to see an average decline of 1.5%. When you compare this to the 2% revenue decline that analysts see for Pitney-Bowes, you can see that things aren't quite as bad as many would predict. In fact, only Oracle can boast revenue growth of 5% or better of these four competitors in the enterprise solutions space. Pitney Bowes is also trying to grow their other divisions to offset the decline in traditional mail processing with their other divisions, but with mixed results.
The company's Management Services division saw just a 3% decrease in revenue, but earnings dropped by 37%. Pitney Bowes Marketing Services unit saw better results where a 1% decline in revenues turned into a 10% increase in earnings due to expense management. The best performing division was the company's Mail Services division which showed revenue up 5%, but earnings increased over 170% due to the lack of a one-time expense in the prior year. As you can see, though the company's overall results don't scream buy, a better gauge of how the company is doing can be found looking at the company's financials.
One of the primary reasons for investors to consider Pitney Bowes as an investment is the company's financials. With a dividend yield above 11%, the most important reason to buy the stock is the dividend. The company generated $301 million in free cash flow and paid out just $84 million in dividends. With a 27.91% free cash flow payout ratio, investors who are betting against the company need to think long and hard about this number. In addition, the company used some of its cash to retire $400 million in long-term debt, which will cut interest expense going forward. While the company still carries long-term debt of $3.3 billion, clearly the company's free cash flow is sufficient to more than cover interest expense, capital expenditures and more. The company expects revenues to be flat to a decline of 4% next year, but free cash flow should range between $750 million and $850 million. If the company maintains its current payout, this cash flow generation would indicate at worst a 2013 payout ratio of just 44.8%. While turning around a company with this much of their business tied to postage and servicing will be a challenge, Pitney Bowes is still producing significant cash flow. If analysts are correct and the company manages to even increase earnings by 4% as predicted, this story could get real interesting. With investors snapping up shares of high-yield companies, Pitney Bowes is being unfairly punished, and its 11% dividend looks very safe. I would suggest investors do their own research and see if short sellers might be stamped out.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
