Pitney Bowes Inc.: PBI Stock Has Strong Dividend Growth
Where Pitney Bowes Stock is Now
Pitney Bowes, Inc. (NYSE:PBI) is best known as the longtime manufacturer of the postage and mailing machines used in most offices. PBI stock has gone through a tough period with the rapid development of e-mail and text-based communication. PBI stock cut its dividend by 57% in 2013 to retain more funds for debt reduction and to develop new business units. PBI stock has a generous current dividend yield of 4.24% as of this writing.
PBI stock pays an annual dividend of $0.75 per share. With fully diluted earnings per share (EPS) of $1.47 and cash on hand of $750.0 million, the dividend is well covered. A combination of debt repayment, combined the redemption of preferred stock, is improving the firm’s capital structure and improving free cash flow. Recently issued debt has received a stable “BBB-” from Fitch Ratings. Pitney Bowes’s debt is now just below investment grade, but it faces business challenges that could make obtaining a higher rating difficult. (Source: “Fitch Rates Pitney Bowes’ New Senior Notes ‘BBB-‘; Outlook Revised to Negative,” Business Wire, September 20, 2016.)
The Challenge Facing Pitney Bowes Stock
Pitney Bowes’ legacy mailing business has high margins. However, this segment of its business is declining. The company is attempting to replace it with digital solutions that have lower margins and greater competition. Pitney Bowes is doing a reasonable job of maintaining revenues, but faces many obstacles to achieving any significant revenue increases.
Pitney Bowes is using its leading position in the mailing equipment business as an entry to providing logistical and e-commerce solutions to the more-than-1.5-million small businesses it serves, along with the 90% of the Fortune 500 it counts as clients. As more companies turn to digitally delivered invoices and online customer accounts, Pitney Bowes is creating software and cloud-based solutions to synchronize all shipping, orders, payment, customs details, and customer account information with physical shipment information across multiple delivery companies on a global basis.
The company’s most powerful new applications involve the management and data mining of customer information. It combines this information with a combination of customer preferences and the tracking of the geographical location of more than 1.2 billion social media users to create opportunity profiles for clients. The client can then engage customers using both traditional mailing services and the customer’s preferred forms of digital media contact. Marketing support and the creation of on-demand individualized printed, sorted, and mailed sales material is one of the company’s brighter potential growth areas, and this business plays perfectly to the company’s hardware products. Pitney Bowes can either supply the physical systems and software necessary directly to the customers or provide the service utilizing cloud-based applications connected to Pitney Bowes-run facilities.
Final Thoughts on PBI Stock
Despite the challenges it faces, Pitney Bowes is in solid financial shape to maintain the current 4.24% dividend yield, which makes PBI stock a strong income investment. Its strategic plan, in combination with the continued growth of e-commerce, has the potential to create slow but steady growth in net income to enable a steady growth of the dividend, which should raise the stock price.
The company has purely hypothetical potential as a takeover target. The legacy hardware and services business has created strong customer ties that may have value to technology companies that specialize in cloud-based solutions, such as the ones Pitney Bowes is creating, and would like access to PBI customers.
Pitney Bowes could also be attractive to other legacy equipment manufacturers or service providers. Companies such as HP Inc (NYSE:HPQ) and Xerox Corp (NYSE:XRX) could take advantage of cross-selling products to Pitney Bowes’ customers or integrate those products into Pitney Bowes’ service packages. Hewlett-Packard, which has a direct-to-retail customer division, could extract significant value from the wealth of social media data. There is no guarantee of any takeover happening, but it does add to the upside potential of PBI stock while tempering the downside.