by Marc Bastow | May 11, 2012 5:18 am
Imagine the conversation that Pitney Bowes (NYSE:PBI) founders Arthur Pitney and Walter Bowes — who started the postage meter and business machine company in 1920 — might have if they were still around today.
Hold on! With today’s technology, we can drop in on that conversation right now from somewhere in the great beyond:
Mr. Pitney: Walter, what the heck is going on down there at our headquarters in Stamford, Connecticut?
Mr. Bowes: Nothing but trouble, Arthur. We’ve got a company that doesn’t look much different than it did back in the 1920s, and I don’t mean that in a good way.
Mr. Pitney: What do you mean?
Mr. Bowes: Well, our business model is pretty much the same as it’s always been. Mail is the staple of the firm — whether it’s the postage meters that every office had back in the 1990s or stamping machines or document messaging, it revolves around the mail. And mail as we knew it back in the day isn’t what it is today: a slowly shrinking service in turmoil.
Mr. Pitney: Don’t people still send letters and mail through the Postal Service?
Mr. Bowes: Sure they do, just not nearly as often through the old “snail mail” model.
Communication is all about digital platforms. Standard mail is replaced by new-fangled technology like email and Twitter and such. The Postal Service is dying a slow death, and the long-term trend points in the wrong direction for standard mail service. And a long time ago somebody came up with the idea of FedEx (NYSE:FDX) and UPS (NYSE:UPS) — yet another model that eats into our lunchboxes.
And let’s face it: We dropped the ball on the digital age. Stamps.com (NASDAQ:STMP), Newell Rubbermaid’s (NYSE:NWL) Endicia.com unit and PBI are the only three PC-approved online postage providers. Unfortunately, our share of a shrinking market is small.
Our software and services segments make some money, but too little to make a big difference. I fear we didn’t make that connection soon enough.
Mr. Pitney: Ouch. So where do we stand today?
Mr. Bowes: Remember that dividend we started back in 1956 when we joined the S&P 500? Well, it’s still there. In fact, it’s now up to 38 cents per quarter, or $1.52 per year! Our investors love the dividend.
Mr. Pitney: Why, that’s great! What’s the problem?
Mr. Bowes: We can’t really afford it, and with our stock price languishing at just above $14 per share, our dividend yield is in junk-bond range at 10%.
In fact, Standard & Poor’s Ratings Services just lowered its ratings outlook on us to negative from stable, citing challenges in stabilizing our revenue base. They did affirm our BBB rating, but that’s only three steps from junk status.
Mr. Pitney: What do you mean we can’t afford the dividend? Don’t we have plenty of cash lying around?
Mr. Bowes: Well, kinda. Sure, we have $800 million in cash, but we needed almost $573 million last year to cover dividends and capital expenditures, and that number is up from 2010 when we needed $441 million. We’re also borrowing a ton of money, and our debt level is just over $3.8 billion. We have a positive net worth, but if you take out the goodwill from some of our purchases, well, we don’t look so hot anymore.
Mr. Pitney: My God, Walter, is their any good news?
Mr. Bowes: I’m afraid not yet, Arthur. Earlier this week we reported that first-quarter earnings rose 80% on tax benefits and other items … but revenues decreased 5%, mostly because that darned mail business dropped 7% with no clear pickup in sight.
It seems that only our dividend makes people want to invest in the stock. We have a P/E of 7.2, but nobody values our future sales model.
Mr. Pitney: I still have some stock left over in my trust account. I am inclined to sell. What are you going to do, Walter?
Mr. Bowes: I’m not sure yet. I’ll email you.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long PBI.
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