In this post I wanted to highlight two business service companies that are looking very attractive as the economy recovers and business activity begins to pick up.
First I would like to highlight Deluxe Corporation (NYSE:DLX). The Company operates in three segments: Small Business Services, Financial Services, and Direct Checks. Its Small Business Services segment has provided products and services to over 4 million small business customers and its Direct Checks segment has provided products and services to more than 8 million consumers. If it’s printed, deposited, or mailed/handed out, Deluxe Corp can do it. From their most recently quarterly report revenue grew 6% over the prior year, small business services revenue grew 11%, checks and forms performed well and marketing solutions and other services revenue grew 26% over the prior year. All of this points to a rebounding economy and a company well poised to take advantage of it.
The next company I wish to highlight could not be a more different story. Pitney Bowes Inc. (NYSE:PBI) has done nothing but gone down the past few years and has had annual revenue declines every year since 2008. This is unsurprising when you discover that they make equipment designed to facilitate office mail. The US Post office is always complaining about double digit declines in mail and this has no doubt impacted Pitney Bowes bottom line. If you’ve ever gone to an office mail room and used the machine that prints a pre-sorted first class stamp on a letter (very quickly I might add), that’s the work of Pitney Bowes.
My rationale for recommending Pitney Bowes is a little different however. While I do believe that any increase in economic activity while be beneficial, I understand that Pitney Bowes still has work to do to overcome the consistent decline of mail by companies. Two things however are in their favor. First, the expectations by the street are rock bottom. We saw this when the stock jumped nearly 20% after they posted their Jan 31 earnings release. Second, they are currently yielding over 10%.
Normally when you see a company yielding double digits (and its peers are nowhere close) you think this is a stock who’s share price has dropped precipitously and has had their fundamentals eroded to where the dividend can’t be sustainable.
Many people believed that this was the case with Pitney Bowes and their $0.375 quarter dividend. Most of the jump on earnings day was shorts covering their position because the company reaffirmed their dividend (the ex-date is Feb 15 for those looking to earn a cash payout) and highlighted that they still generate ample amounts of free cash flow from operations. Pitney Bowes can easily afford to pay its dividend from this cash flow. Pitney Bowes generated full year 2012 free cash flow of $769M, while dividend payments were only $300M. Basically, the dividend is here to stay, so while I do expect the drops in revenue to stabilize (and maybe even turn positive), the bigger attraction is the large (and safe) dividend. As investors catch on to this, I do not expect the yield to stay at 10%. The share price will be bid up to bring it back to a more appropriate level.
The article Business Service Companies Becoming Interesting originally appeared on Fool.com and is written by Chris Martin.
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