Wednesday, July 18, 2012

Ten Percent Yield - Should you touch it?

A German postage meter marking made with a Pit...A German postage meter marking made with a Pitney Bowes system. Русский: Штамп франкировальной машины системы Pitney Bowes (Германия). (Photo credit: Wikipedia)
Dividend Machines are only one of the investments I use for income.   I provided two ideas for interest income earlier this week.   Today I have not a dividend machine but an almost dividend machine that pays over a 10 percent dividend.

I am usually very careful about buying a company with such a high yield even with a strong
dividend history.    The reason this company does not qualify as a dividend machine is due to their debt to equity ratio being astronomical.    I have to stick to my guns about my disciplined approach to dividend machines so I cannot include this company in my 2012 dividend machine list.  I am tempted since they have raised the dividend every year for thirty years but I cannot include them in the 2012 dividend machine list.

  However, I allow myself discretion, if on further inspection a company warrants, I just might buy their dividend.

Pitney Bowes (PBI) is known for is postage meters.  But in today’s world, it has developed into an IT hardware company.   They earned $3.42 over the last four quarters and paid out $1.49 in dividends.  The newly raised quarterly dividend of $.375 would not appear to be in jeopardy.   They have plenty of cash flow to cover the dividend and pay for the stock buyback.

PBI used debt to buy stock.  This is why their debt to equity ratio is excessive. There are many reasons a company may do that.  Usually it gives a boost to the stock price since there are fewer shares available.    PBI’s stock price, however, has suffered mightily.   In the past, it has traded in the $30 range.   In 2008, the signal came and the price was in the teens.  Now through some ups and downs, the stock price is only $13.45.  Bad news for those who bought at $30 but good news as the ordinary investor has a chance to get a yield of 11.15% without a large capital investment.

PBI’s website states they are committed to paying off debt.  In fact, they are redeeming some bonds due later this year.  They state they are also investing in their future.  If history is any guide, this may be a nice income investment.   Only you can decide if it is right for your portfolio.

Very Truly Yours,

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