3 Things to Watch With Pitney Bowes

Pitney Bowes (NYS: PBI) provides hardware, software, and services to the physical and digital delivery sector.

Today, let's look at three things investors should be watching regarding Pitney Bowes, as they will provide us better insight into the company.

1. The health of the U.S. Postal Service
Although Pitney Bowes isn't reliant on physical mail for a huge portion of its revenue, it nonetheless plays a big enough part that the health of the U.S. Postal Service is the first factor investors should keep their eyes on.

The U.S. Postal Service is a mess. Forecasts call for the nation's physical mail service to lose $14.1 billion in 2012, and those losses could balloon to $26 billion by 2016 unless something is done quickly. The USPS had attempted two radical changes that would have saved the agency billions, but both failed to gain the appeal of Congress or the public.

The first attempt was recent and involved trying to shut down 3,700 of its low-volume rural post office locations. However, because of small-community backlash, that idea was squashed. Second, in 2008 the USPS attempted to persuade regulators that it should be allowed to sell agency-branded postage meters to corporations (i.e., stepping on Pitney Bowes' toes). This idea was also rejected after Pitney Bowes appealed to regulators claiming it would be an immediate blow to its business.

Simply put, a decline in mail volume because of an increase in digital mail delivery has put the USPS on a long-term decline, and Pitney Bowes' physical business is going to suffer through weak replacement orders until that business stabilizes. Keep your eye on the USPS for clues as to when Pitney Bowes' physical mail business may pick up.

2. Pitney Bowes' partnerships
To counteract weakness in the physical mail business as a result of the U.S. Postal Service's decline, Pitney Bowes has turned to expanding its software offerings in the financial, governmental, and telecommunications industries, as well as bolstering up its partnerships in a true "if you can't beat them, join them" approach.

In 2010, Pitney Bowes partnered up with FedEx (NYS: FDX) and United Parcel Service (NYS: UPS) to counteract falling mail volumes. However, as my Foolish colleague Dan Caplinger pointed out earlier in the year, FedEx's and UPS's gains haven't helped Pitney Bowes reverse its sales decline.

More recently, Pitney Bowes forged a multiyear agreement with social-media behemoth Facebook (NAS: FB) to supply geocoding software. Although it's still far too early to tell how successful this partnership will be for Pitney Bowes, it's hard to argue that the deal won't be lucrative, with Facebook's user base now tipping the scales at 955 million.

With Pitney Bowes missing its chance to lay claim to the online postage printing market, which has gone predominantly to Endicia.com and Stamps.com (NAS: STMP) , these partnerships and its software sales are where its future growth lies.

3. Dividend, dividend, dividend!
The real reason investors keep giving Pitney Bowes the time of day in spite of its shrinking mail business is its ridiculously large dividend yield of 11%. Assuming the proceeds of this dividend were reinvested and the share price remained constant, you'd have a complete dividend payback in just about six and a half years! That's a phenomenal return that has aggressive income seekers intrigued, but there's more to watch than just the yield.

For starters, Pitney Bowes carries a lot of debt. The company's current debt load of $3.68 billion and net debt position of $3.14 billion seems rather unsustainable, given that its revenue has shrunk in four straight years -- a trend that has shown little sign of abating. Also, in spite of raising its dividend for 30 consecutive years, Pitney Bowes' streak seems to be in severe jeopardy, with its payout ratio spiking to 77% of next year's forecasted EPS. While that's not unsustainable, a dividend reduction to conserve cash and pay off debt seems more likely by the day.

All told, even if Pitney Bowes were to reduce its yield in half, shareholders would still be receiving a yield above 5%, and the company would be able to conserve an additional $150 million each year to pay down debt. It's something worth considering if you're a current shareholder or thinking about investing in Pitney Bowes.

Foolish roundup
Now that you know what to watch for, it should be easier to analyze Pitney Bowes' successes and failures in the future and hopefully give you a competitive investing edge.

If you're still craving even more info on Pitney Bowes, I would recommend adding the stock to your free and personalized Watchlist so you can keep up on all of the latest news with the company.

Will partnerships like the one Facebook set up with Pitney Bowes help or hurt Facebook's long-term growth prospects? Get the answers to this and many other questions regarding Facebook's opportunities and pitfalls by getting your copy of our latest premium report on the company. Each report comes with a full year of regular updates and costs less than a week's worth of coffee. Get your investing edge with your premium report on Facebook.

The article 3 Things to Watch With Pitney Bowes originally appeared on Fool.com.

Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.Motley Fool newsletter serviceshave recommended buying shares of FedEx and Facebook. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policythat's printed with transparency.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.