Shares in Pitney Bowes Inc. (NYSE:PBI) fell 12.9% in May, according to data from S&P Global Market Intelligence. The decline was led by an earnings presentation that may have disappointed investors because of its forward dividend yield of nearly 8.2%.
In a nutshell, Pitney Bowes agreed to sell its Document Management Technologies (DMT) production mail business -- a highly cash generative business -- and as a consequence lowered its full-year earnings and free cash flow (FCF) guidance. Previously, management was expecting $1.40 to $1.55 in full-year earnings per share, but the new guidance range is $1.15 to $1.30. Meanwhile, previous full-year FCF guidance was $350 million to $400 million, and now its $300 million to $350 million.
The reduction in FCF guidance will concern dividend-hunters because it reduces the cover on Pitney Bowes dividend payout of around $140 million. Moreover, CEO Marc Lautenbach answered a question about the dividend on the earnings call and failed to rule out a cut. After claiming he favored a competitive dividend, Lautenbach said, "As your peers change, the net calculus change. And the second to your point is the size of the company. So, right now I would say that we are in-flight in terms of becoming a growth company."
Pitney Bowes is an unusual stock as it offers two related, but separate, investment themes. One group of investors see it as a deep value stock that's engaging in a turnaround story as management invests its way out of structural declines in its legacy business (mail metering and support services) toward higher-growth activities like global e-commerce shipping solutions.
This group would probably be happy with the sale of DMT and glad that the $270 million proceeds were earmarked to reduce Pitney Bowes's $3.58 billion debt. Moreover, a dividend cut would probably be welcomed too, so as to enable the company to accelerate from mailing solutions to e-commerce shipping.
The other group, let's call them income-seeking investors, would not be happy if Lautenbach did anything to cut the dividend, primarily because they were attracted to the stock for its high yield in the first place. In this context, it's not hard to see that this group would have been disappointed in the earnings presentation.
You can't please all of the people all of the time. Clearly, Lautenbach needs to carry on the strategy of divesting legacy businesses in order to acquire and grow its shipping related revenue. Meanwhile, his promise to "relook" the company's "capital allocation priorities" could result in a dividend cut that could be used to reduce its substantive debt load while Lautenbach attempts to turn Pitney Bowes into a growth company again.