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The entrance of a United States Post Office is seen in Manhasset, New York. (SHANNON STAPLETON/Reuters)
The entrance of a United States Post Office is seen in Manhasset, New York. (SHANNON STAPLETON/Reuters)

VOX

Pitney Bowes struggles to deliver amid declining mail volumes Add to ...

The poor, pitiable United States Postal Service, suffering from declining mail volumes and burdensome employee benefits. It seems any company that ties its fortunes to the U.S. Mail risks riding into the dark, irrelevant night along with it.

This seems an apt description of postage-meter-maker Pitney Bowes Inc., regarded more than a decade ago as one of the best stocks in America, but now badly beaten down after yet another earnings miss a week ago.

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It would also seem to apply to Stamps.com Inc., which does exactly what you would think: sell postage online. Stamps.com, however, put up a gaudy earnings beat late last month and is up more than 30 per cent over the last few trading sessions.

How can their fortunes be so different? And, importantly, are either company’s shares worth a look?

First, Pitney Bowes. I must disclose, sadly, that I own 200 shares of the company. On a couple of occasions when the U.S. markets have gone in to major spasms, in 2010 and 2011, I bought a range of large dividend-paying companies. All of them – all of them – are up, save Pitney Bowes, on which I have a 40 per cent loss.

I was enticed by a dividend yield topping 7 per cent at the time of each purchase. Now, even better: Pitney Bowes yields more than 12 per cent!

Unless, of course, it’s not sustainable, which is entirely possible. I’m willing to give companies a benefit of the doubt on this – note my recent opinion on Penn West Exploration (tgam.ca/Diak) – but when yields climb into double digits, I get more concerned.

For now, the dividend is clearly supportable – currently, the company throws off about $800-million (U.S.) in free cash flow (operating cash flow minus capital expenditures and other items like restructuring charges), or about $4 per share. (At recent prices around $12, the free cash flow yield is a tantalizing 33 per cent.) The dividend is just $1.50 per share.

Still: While Pitney Bowes is more than just U.S. postage meters – 32 per cent of its sales are international, and it offers facility management services and customer-relationship management software – nearly all of its business segments report falling revenue, with an overall 6 per cent decline in the top line in the third quarter, compared with 2011.

Standard & Poor’s analyst Jim Corridore notes that Pitney Bowes has supported its cash flow by cutting capital expenditures to levels below the annual depreciation and amortization of its assets – an imbalance often regarded as a red flag for future dividend payouts.

However, Mr. Corridore, who has a $15 target price on the company, does not believe a cut in the dividend rate is likely, in part because he sees the company’s revenue issue as primarily cyclical, not secular. He believes Pitney Bowes will “return to slow growth by most financial measures over the next few years as the U.S. economy recovers.”

If Pitney Bowes can grow, Stamps.com can grow even more. Contrary to the former’s declining sales and profits, Stamps.com, which sells postage almost exclusively over the Internet, posted 17 per cent sales growth and a 40 per cent gain in earnings per share in its most recent quarter, compared with 2011 levels. The EPS number beat Wall Street expectations significantly.

It seems Stamps.com is in the mode where it can easily surprise investors with its growth; those are the kind of stocks that also can offer concomitant gains.

However, there are warning signs. A major partner, Amazon.com Inc., introduced a competing postage platform for for its “Marketplace” sellers, who still mostly ship their wares through the U.S. Postal Service. That removed Stamps.com’s exclusive offering on the site. And Stamps.com’s “PhotoStamps” business, which allows users to create U.S. postage using their own photos or business logos, posted an 18 per cent year-over-year decline in the recent quarter.

My take: Pitney Bowes may appeal to value vultures with a willingness to, as the old saying goes, catch a falling knife. Meanwhile, Stamps.com may offer a chance for healthy profits in the short term – but, ultimately, may stall and fall as it hits the limits of how much money can be made when you try to grow as your partner business is declining.

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