Pitney Bowes: Is Sales Growth And 4%+ Dividend Enough To Stop Carnage?

Pitney Bowes Oficina Central de Canadá en Mississauga, Ontario, Canadá

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Intro

As we can see from the technical chart of Pitney Bowes Inc. (NYSE:PBI) below, shares lost support in January of this year. Although the bearish triangle may look like it is near completion, Pitney’s bounce out of its January lows this year has been weak, to say the least. Although the company missed earnings estimates in the fourth quarter of fiscal 2021, full-year sales still grew by 3% to reach $3.67 billion with Presort and SendTech reporting annual gains. This means Pitney has grown its top-line sales for the past five years and this metric remains the key calling card for value investors in this company. The reason being is that Pitney Bowes’ sales continue to trade on the cheap which is evident from the company’s ultra-low price to sales multiple of 0.22. Many investors, however, have found out the hard way that price action in stocks can remain irrational for lengthy amounts of time.

In an ideal world, growing sales over time result in a higher share price as long as the profitability is there to support sustained reinvestment. Management stated on the fourth-quarter conference call that it expected operating profit to increase by approximately 2% to 5% in fiscal 2022 but this estimation will be heavily influenced by supply chains as well as a potential increase in Covid restrictions.

Investors can also avail of the generous 4%+ dividend yield on offer. The question here though is how strong is the payout at present. Strong sustainable dividends have been proven to correlate with share-price appreciation in the long run. Therefore, let’s delve into the company’s key metrics which make up the dividend to see if we can gain insights into where PBI shares are headed going forward.

Technical Chart Of Pitney Bowes

Technical Chart Of PBI (StockCharts.com)

Dividend Growth

Although Pitney’s yield may have surpassed 4% of late, it is not the consequence of growth but merely the result of a falling share price. Management cut the dividend to $0.20 per share in fiscal 2019 and the $0.05 quarterly payout has stayed at this level ever since. This means growth has been non-existent for quite some time now which is a worry in the high-inflation environment we are witnessing at present.

Cash-Flow/Pay-Out Ratio

Pitney reported $117 million of free cash flow in fiscal 2021 from which $35 million was paid out to shareholders in the form of a dividend. This gives us a cash-flow pay-out ratio of approximately 30% which actually looks attractive from an affordability standpoint. However, cash flow can be generated in a multitude of ways, and the company actually drew down $189 million from its cash balance in fiscal 2021 to meet financial and investing activities.

Debt To Equity

At the end of fiscal 2021, Pitney reported approximately $2.3 billion of long-term debt and shareholder equity of around $113 million. Although this looks negative on the surface, the company has $4.6+ billion of treasury stock which is essentially stock that has been repurchased but has yet to be retired. Having almost $5 billion of treasury stock on the balance sheet (considering Pitney’s present market cap is $830 million) is a big plus, and if we added this number back to shareholder equity, it quickly becomes apparent that Pitney’s debt load is manageable.

Interest Coverage Ratio

Pitney’s interest expense in fiscal 2021 came in at $97 million and operating profit came in at $151 million. This gives us an interest coverage ratio of 1.56. Here is where the crux of the issue is with respect to the viability of the dividend – a lack of earnings growth. Although EBIT grew by 3.4% last year, operating profit remains down by over 26% on average per year over the past three years alone. Although the company did refinance its debt recently out to further maturities, growth is needed in order to drive investment forward.

Conclusion

From looking at Pitney Bowes’ various metrics that make up its dividend, the clear issue that the payout will have to deal with going forward is earnings growth. Internally, the company has the foundation to turn things around. It has a relatively strong balance sheet, and cash flow is expected to remain buoyant. Nevertheless, consistent sales growth has not been enough to compensate for the significant erosion we have seen in the company’s gross margins. Stability here would go a long way to ending the stock’s bearish trend. We look forward to continued coverage.

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