Shares in mailing solutions company Pitney Bowes Inc. (NYSE: PBI) declined 23.3% in the first-half of 2018 according to data from S&P Global Market Intelligence. The decline is most likely due to doubts about the viability of its turnaround strategy and the sustainability of its current dividend yield of around 8.2%.
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In a nutshell, the company is trying to move away from its traditional business of mail metering and production mailing toward adjacent e-commerce shipping solutions. The former is seen as a marketplace in structural decline, while the latter offers good growth prospects.
As part of the process, management has been shedding its legacy business, such as the sale of the Document Management Technologies (DMT) business (production mail) for $361 million, and buying e-commerce shipping businesses. While this a perfectly feasible idea, it has the tendency to reduce near-term earnings and cash flow and could challenge the company's ability to service its dividend.
For reference, on its last earnings call, Pitney Bowes's full-year EPS guidance was cut to a range of $1.15-$1.30 from a previous range of $1.40-$1.55. Meanwhile, full-year free cash flow guidance was cut to $300 million to $350 million from a previous range of $350 million to $400 million. Pitney Bowes' current dividend of $0.75 a share implies a payout of around $140 million.
The turnaround will take time and the company's margins are likely to come under pressure as management continues to invest in its growth business (e-commerce shipping solutions) while jettisoning cash generative and profitable legacy businesses.
Moreover, CEO Marc Lautenbach has promised to take a new look at the company's "capital allocation priorities," so don't be surprised if a dividend is cut in the future.
The company needs to convince investors that its turnaround strategy will work and the market will be eagerly following every quarter's results with a view to seeing progress on that front. It's a delicate balance of investing for growth while trying to maximize value from its legacy mailing solution assets. The success of which will dictate the stock price movement.
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