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Death of a Double-Digit Dividend

Rest in peace, Pitney Bowes (NYSE: PBI  ) double-digit dividend yield. We hardly knew you.

Perhaps I'm a little premature in expressing condolences, but it's just a matter of time. Pitney Bowes pays a 10.8% dividend yield now. It won't last. This double-digit dividend yield will die in one of two different ways. Here are the potential paths for the high dividend's demise.

Paper cuts
Pitney Bowes' double-digit dividend yield was born in 2012. Its parents were a rapidly tanking stock and a Dividend Aristocrat company committed to increasing dividends like it did in its heyday. The rest of the eulogy remains to be written.

The 10%-plus yield could possibly die from "paper cuts" -- serious reductions in mail volumes. Ironically, these paper cuts also resulted in the high yield's birth.

Pitney Bowes' shares plunged with the rest of the market in the midst of the 2008 financial crisis. However, the stock didn't make a comeback in 2009 like others did. Revenue fell year after year.

PBI Chart

PBI data by YCharts

Erosion of sales came largely from a paradigm shift in the way organizations view mail and paper in general. The Internet skyrocketed in usage. Internet technology matured. Businesses and nonprofit organizations looked aggressively for ways to cut costs.

The decision to reduce traditional mail and use email or other alternative communication and marketing strategies was a no-brainer for companies like Genworth Financial (NYSE: GNW  ) . Like many other financial services firms, Genworth embarked on multiple ways to reduce paper.

This change hit other companies hard also. Xerox (NYSE: XRX  ) , which specializes in document management, saw its shares plummet by more than 50%. The stock still hasn't recovered to its 2008 levels.

Will these paper cuts kill Pitney Bowes' double-digit yield? It's possible.

Continued revenue decline could put pressure on the company to use its cash to expand into another growing business. Such a move could require dividend payments to be reduced. While it might seem unlikely that an S&P Dividend Aristocrat would take this kind of action, necessity can be a powerful motivator.  

Stopping the bleeding
There is another possible cause of death for Pitney Bowes' double-digit dividend yield. The stock could go up, resulting in the yield dipping below 10%. There are several reasons why this scenario could occur.

First, while revenue has dropped steadily over the last few years, earnings and free cash flow appear healthier. They're not great, but they're not spiraling downward.

PBI Earnings Per Share Chart

PBI Earnings Per Share data by YCharts

Another possibility is that the stock has hit bottom already. Several officers and directors of Pitney Bowes recently bought shares in the company. Either these insiders truly believe Pitney Bowes stock stands ready to move higher or they desperately want those of us who watch insider trading activity to think so.

The company continues to invest in digit communication services in an effort to reduce its dependency on traditional mail. It's too early to know how these efforts will pan out, but they could help Pitney Bowes stop the bleeding and help the stock to rebound.

Finally, the high yield might contribute to its own demise. If investors think that Pitney Bowes likely won't drop much further than it has, the current high yield could entice them to buy shares. Greater demand for the stock would cause share prices to rise. An increase of a little over 10% would push the yield back into the single-digits.

Risky undertaking
Pitney Bowes operates in a market experiencing secular decline. Buying its stock just for the sky-high dividends is a risky undertaking. If shares continue their multi-year decline, investors could be left in the lurch.

Dividend investors can find better opportunities in companies with stronger moats. Health-care REIT Medical Properties Trust (NYSE: MPW  ) , for example, owns and leases hospital properties. The company pays a dividend yield of 8%. Utility company Exelon (NYSE: EXC  ) offers a lower but still strong yield of 5.5%.

Neither of these companies matches the current double-digit dividend yield of Pitney Bowes. Of course, my view is that yield will drop in the not-too-distant future. Finding another stock makes sense -- unless I'm dead wrong.

If you're looking for other great dividend stock ideas, check out The Motley Fool's special report "Secure Your Future with 9 Rock-Solid Dividend Stocks." It won't be available forever, so get your free copy now!

Fool contributor Keith Speights owns no shares in the stocks mentioned above. Motley Fool newsletter services have recommended buying shares of Exelon and creating a write covered straddle position in Exelon. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (2) | Recommend This Article (4)

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  • Report this Comment On August 24, 2012, at 3:49 PM, lazyal wrote:

    Your obituary is premature, IMO. In their most recent quarter, PBI met earning and revenue expectations and reaffirmed guidance. Despite stagnant growth, this does not appear to be a company ready to reduce it’s dividend any time in the near future. By all normally applied parameters (revenue, earnings, cash flows, dividend and guidance) this is stock would be fairly valued in the $20-25 range.

    I agree that the dividend yield will be lower in the future-- but that will because the stock price has increased, not because the dividend was decreased.

  • Report this Comment On August 27, 2012, at 4:02 PM, clipthecoupon wrote:

    Have you noticed that 32% of the float is short?

    They are short the dividend as well.

    Dividend appears safe due to current cash flow!

    Shorts have a nice gain that is being eroded by the dividend!

    Short Squeeze to come!

    Up Up and Away!

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