10% + Yield With Plenty of Promise And Risk

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Pitney Bowes (NYSE: PBI) has been hard hit by the Internet because it is so tied to regular mail services. Still, the company is working hard to catch up to the times. It has historically shown a stern commitment to its dividend, which it has increased annually for years. With investors clearly pricing in a dividend cut, is it worth the risk of buying the stock?

It's Hard to Change

Pitney Bowes is best known for making postage meters and other physical mail related products. That was a great business to be in until the Internet. Email and PDF documents now make sending information that once would have been mailed faster and easier to send over the web than through the mail. Even advertising has increasingly shifted from mail to the Internet, in many cases. This has done bad things to Pitney Bowes' business and investors' perception of the company.

Interestingly, its legacy business is still throwing off large amounts of cash as it slowly fades. Thus, the company still has ample cash to pay its dividend and, more importantly, refocus its business. Indeed, it is actively trying to move into the digital space. That said, Pitney Bowes' big opportunity is also its biggest threat. If it can make the shift successfully, it wins. If it can't, it probably dies a slow death. That it is coming late to the party is a big concern, since it has had to use mergers and acquisitions to make up lost ground. These actions have notably increased the company's debt load.

A Big Yield and Big Risks

Although it is being priced as if it is going to go out of business, or at least be forced to materially trim its dividend, there is a chance that the company will be able to change and hold its disbursement. Altria, at one point, was a 10% yielding stock, too.

That said, it's important to keep the risks in mind. Here are three to look into:

Does the New Business Gain Traction?

Pitney Bowes has been shifting toward more service and Internet related businesses. One of the company's most ambitious efforts is Volly. This service is “a cloud-based secure digital mail communications platform.” Essentially, it is a way for customers to integrate their communications across the physical and digital worlds.

That idea is a good one in some ways, but could be so late to the Internet party that it may not take off. Other notable online services include pbWebConnect, pbSmartPostage, pbSmartConnections, pbSmartMarketer, pbSmartCodes, pbSmartMobile, and SendSuite Live. Many of these are directed at smaller customers. Clearly, the company is working hard to move into the digital space and tap its existing customer base.

Indeed, one of Pitney Bowes' greatest assets is its customer base. The list of clients using the company's legacy products is massive and includes large and small companies, alike. It is possible that enough customers could be convinced to switch to the new services that they slowly replace the legacy revenues lost to Internet communications.

In 2012, the company reported relatively positive results, particularly at some of its services businesses. It also highlighted backlogs in some businesses that bode well for future periods. Still, the top line was down slightly for the year, continuing the long-term trend (though at a lesser rate of decline). So while the new businesses may be gaining traction, it is far from clear that this will be enough to keep the company going. Management, however, is optimistic, suggesting that revenues in 2013 will be flat to slightly higher.

If that were to happen, the company would clearly be moving in the right direction.

How Fast Does the Legacy Business Die?

Demand for postage meters is clearly going to diminish over time. How fast is a tough question to answer. However, it is one that investors need to think about. So despite the positives the company is seeing, its recurring revenues from its installed base of postage meters continues to decline. That said, the rate of decline seems to be slowing down.

While a less material decline is still a decline, it suggests that there could be a light at the end of the tunnel. For example, while the Internet is clearly going to make some business simply disappear, there will likely always be a base level of demand for this medium of communication. Thus, the initial wave of shifting could be nearing an end. Moreover, should the difficult economic environment of the last five years or so start to reverse course, demand could actually inch up enough to keep the declines in the low single digits.

That would give the company's legacy cash cow business a fairly long life. Of course, continued economic weakness could cause just the opposite scenario. Investors need to keep an eye on the company's installed base of customers and the new sales/leases of postage meters to get a sense of how bad things really are in the legacy business.

What About the Competition?

The technology space is full of companies ready to help business customers make sales. These are often Pitney Bowes' current customers and the very same ones that the company is targeting with its own Internet initiatives. And some of the players the company is up against are fierce.

Constant Contact (NASDAQ: CTCT), for example, was only created a few years ago but has already made a huge name for itself. And, its email services make it easy for anyone to create, manage, and send communications to customers and potential customers. Its got a large following in the small business arena. It competes directly with new services created by Pitney Bowes, but has a leg up because its web offering has been around longer.

Stamps.com (NASDAQ: STMP), which sells postage digitally, is also using technology to encroach on Pitney Bowes' turf. It has made a solid foothold in the small business space selling postage over the internet. This company also has a head start on Pitney Bowes in the Internet postage space, particularly in the small business segment. With a still growing customer base, Stamps.com's business is clearly going in the opposite direction of Pitney Bowes' business. In fact, Stamps.com is actually seeing more revenue per user across more users. That's a good head start that could get even larger if the U.S. Postal Service continues to adjust its operations and make it harder and harder for customers to get to a post office.

Even Google's (NASDAQ: GOOG) adwords is a competitor because of its massive online advertising reach. Direct mail is an old way of reaching people, Adwords is the new way. While Pitney Bowes' massive customer base gives it a chance to take on both Stamps.com and Constant Contact, keeping up with Google would be nearly impossible. In fact, businesses small and large make extensive use of Google's ad network. And, that network is quickly extending into the mobile arena, where its mobile operating system is one of two main competitors. Pitney Bowes simply can't offer that kind of reach and likely never will.

While online advertising is a growing category, it probably won't completely replace mail, so Pitney Bowes may be able to incorporate aspects of Google's business into its own. While it probably wouldn't earn revenue off those advertisements, it would at least get to retain customers that might go elsewhere. Google, meanwhile, would likely be happy to have Pitney Bowes essentially selling its services for it.

Wild Card?

While the company continues to work through its difficult transition, it is also breaking in a new CEO. New leaders often lead to big changes, particularly when a company is struggling. The new chief executive spent a great deal of time at International Business Machines and has relevant experience. So his addition could be a good long-term event. However, the dividend wasn't increased at the normal time, supposedly to give the CEO time to review the business and come up with strategic plans.

It's never a good thing when a company that has a long history of dividend increases stops increasing its dividend. A cut doesn't always come next, but when combined with a new CEO, that risk increases. Indeed, it will be easier to make that cut now than to admit it is needed later. Avon was in a similar situation before its disbursement was trimmed.

A Whole Lot Going On

There's a whole lot going on at Pitney Bowes. With so many moving parts, it's hard to figure out where the company will end up. While there are positive things happening in both the legacy business and with its new initiatives, dividend focused investors are probably better off elsewhere. Those willing to take on the risks, however, could find the shares trading higher over the long term, even if the dividend gets cut. That is, of course, assuming the company's positive momentum continues.


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Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and International Business Machines.. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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