Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.
Let's examine how Pitney Bowes
1. Yield
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.
Pitney Bowes yields a whopping 8.3%, considerably higher than the S&P's 2%.
2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.
Pitney Bowes has a moderate payout ratio of 49%.
3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Pitney Bowes has a mammoth debt-to-equity ratio of 1,656%, but at present earnings its debt burden is actually affordable; its interest coverage rate is actually a reasonable seven times.
4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Over the past five years, Pitney Bowes' earnings have shrunk at an average annual rate of 7% while its dividend has increased at a 3% rate. The printing industry as a whole is in a difficult place. Analysts are a bit more optimistic about Pitney Bowes. They expect earnings to continue increasing over and above last year's rebound from the recessionary earnings slump.
The Foolish bottom line
So is Pitney Bowes a dividend dynamo or a blowup? There are some big risks, but the dividend isn't a certain blowup either. A drastic collapse in earnings or a spike in the cost of debt would obviously be devastating to the dividend if not the company because of its leverage. But given its modest payout ratio, steady earnings or even slowly declining earnings could be enough to support current dividend levels. So dividend investors will want to pay extra close attention to how Pitney Bowes' earnings manage to navigate industry hardships, in addition to making sure its cost of debt doesn't increase dramatically.
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