These 2 Numbers Make This Yield Unsafe: Pitney Bowes Inc. (PBI)

In an even bigger reversal, analysts have switched from predicting earnings growth to a decline in earnings. Early last year analysts were calling for 6.7% EPS growth, by the middle of the year this growth rate was down to 4%, and today they are calling for a 6% contraction in earnings.

Where Does This Leave Investors?
Honestly, if you look at these three fabled companies, I think Hewlett-Packard has the most promise. All three companies compete directly in the document management and printing industries. Xerox has the lowest yield of the group at 2.14%. Analysts are at least calling for 6.6% EPS growth, and their free cash flow payout ratio is just 14.67%. These numbers aren’t bad, but Xerox’s key market is crowded and the company’s brand doesn’t carry the weight it used to.

This leaves Pitney Bowes versus Hewlett-Packard. Pitney Bowes’ main business is North American mailing, which is slowly fading away. Hewlett-Packard’s main business is PCs, which is also not performing well. The difference is, whereas HP could split the company and thrive, Pitney Bowes couldn’t lose North American mailing and exist. The difference in the two companies’ balance sheets is stark. Hewlett-Packard has almost enough between cash and long-term investments to pay off its long-term debt load. Pitney Bowes would still need about $2 billion to pay off its debt even if it used all of its cash and investments. Though HP’s yield of 3.14% doesn’t look as good as Pitney Bowes over 10% yield, the payout ratios are light years apart. In the current quarter, HP paid just 8.16% of its free cash flow to cover the dividend, Pitney Bowes payout was over 33%.

The bottom line is, Pitney Bowes has one choice, the company either retire debt and push hard to diversify away from North American mailing, or this is going to get ugly in a year or two. While I can say with confidence that HP will be around in a few years, without some major changes, I can’t say the same about Pitney Bowes. That statement alone is enough to make me avoid the company.

The article These 2 Numbers Make This Yield Unsafe originally appeared on Fool.com and is written by Chad Henage.

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