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The Pitney Bowes Blues

10/6/2013

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MARKET CONDITIONS

Warning: This Dividend Stock Is Primed for a Correction. In April, Louis Basenese pegged Pitney Bowes (PBI) as the most dangerous dividend stock on the S&P 500. A cut is imminent, he warned.

Indeed, Pitney Bowes did the expected and cut its dividend by 50%. (Ouch.) In the immediate aftermath, the stock price dipped. And continued dipping. Until the next quarterly release, that is.

On July 30, 2013, the stock rebounded, spiking more than 12% in response to the second- quarter data. And it’s gone higher since, recently trading above $18 per share. But does this mean Pitney Bowes is suddenly out of the dividend doghouse?

Stone Age Technology

The problem for Pitney Bowes is that its bread-and-butter business – providing postal solutions and equipment – is deeply mired in the past. Snail mail is on its way out. (Just think about the troubles the U.S. Postal Service is having.) And as the need for paper-based communication continues to decline, so does the need for many of Pitney Bowes’ products and services. But the company isn’t standing still.

In fact, it’s currently attempting to modernize its way out of obsolescence by offering other products and services, like software and mobile website building and online postage. As a result of such initiatives, the company’s Q2 results were – to the surprise of many – less than disastrous.

Pitney Bowes reported revenue of $1.2 billion, which is essentially flat compared with the same period last year. The company also reported a “continued moderation in decline of recurring revenue streams in the SMB group” (the company’s global mailing operations).

Adjusted earnings per share from continuing operations clocked in at $0.52 per share, representing an improvement of $0.01 over the year before. Further, Pitney Bowes also retired $375 million of debt. One way to interpret the report, as many stock investors apparently did, is that the company is finally slowing the bleeding that, just a few months ago, looked terminal.

Buy, Hold, or Run for the Hills
But that’s the problem. The bleeding has slowed, but will it ever stop? You see, for the first quarter of 2013, Pitney Bowes reported a 4% decline in revenue along with earnings per share that were less than half of what they were the year before, $0.33 versus $0.79. That contraction, along with a 50% cut to the dividend, had investors abandoning the stock en masse.

But now, after reporting improved second-quarter adjusted earnings, bullish risk-takers have piled back into the stock, driving the price up 24% since the July 30 earnings announcement. But that’s by no means a solid indication that the stock’s now worth buying.

You see, shares of Pitney Bowes are actually up 80% since it hit its 52-week low back in December 2012, which makes me more than a little nervous. For one thing, I don’t think the recent news can justify the stock price rising that much. And I’m certain it will take a lot more and much better news to get the stock to rise significantly from here. If anything, it’s primed for a correction.

Pitney Bowes is attempting to move its business into the present, but its prime revenue sources are still stuck in the past and that fact won’t do the company any favors as it tries to unsaddle itself from loads of accumulated debt.

Long story short, the underlying factors that have driven Pitney Bowes into the ground haven’t changed. The company is still ailing considerably.

So don’t be fooled by the price increase. You can get a 4% dividend more safely elsewhere.

Safe investing,

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