Buggy-whip technology is an old investing adage that refers to companies whose products or services have become technologically obsolete. This is an unfortunate inevitability of economic growth: technological advancement in certain industries, while a huge boost to society as a whole, means a few individual businesses will be left behind.
In that vein, here are three stocks that have been left behind by the unstoppable force of technological advancement.
Don’t be fooled by dividend yields
Companies such as Pitney Bowes Inc. (NYSE:PBI) and RR Donnelley & Sons Co (NASDAQ:RRD) are beloved by their investors for their high dividend yields, which stand well above the roughly 2% yield on the broader market.
Of course, a company can only pay a dividend until it can’t, and investors who rush into stocks with abnormally high dividend yields often feel double the pain when a company slashes its payout—once in the form of less income, and again since a stock that cuts its payout usually sees its stock price fall hard.
That’s exactly what happened to Pitney Bowes Inc. (NYSE:PBI), the company behind postage meters, which has seen its share price steadily drop from $34 per share five years ago to its current level of $15 per share.
Along the way, the company’s dividend yield soared into the double digits, since prices and yields are inversely related, which looked great for new investors. After all, who wouldn’t want to receive 13% annually from a stock?
However, in the investing world, something that looks too good to be true usually is just that. Pitney Bowes Inc. (NYSE:PBI) finally cut its dividend in half when management could no longer avoid the reality of its declining business model.
Fellow Fools, don’t let the same thing happen to you. Let Pitney Bowes Inc. (NYSE:PBI) serve as a cautionary tale, and avoid both RR Donnelley & Sons Co (NASDAQ:RRD) and Frontier Communications Corp (NASDAQ:FTR) for the same reasons.
Don’t ignore the warning signs
Thankfully for investors, we have the information necessary to understand when a business is at risk of permanent damage.
For years, Pitney Bowes Inc. (NYSE:PBI) has reported declining revenues. Loyal investors consistently pointed to the company’s free cash flow, which had previously covered dividend payments. Unfortunately, like dividends themselves, free cash flow only exists until it doesn’t. Revenue is the lifeblood of any business, and if sales are in decline, free cash flow will eventually follow.
That’s why RR Donnelley & Sons Co (NASDAQ:RRD)’s 6.6% yield looks better than it is. R. R. Donnelly, which offers labeling and packaging products and distributes its products to end-users primarily through the postal service, generated $11.5 billion in revenue in 2008. Unfortunately, the company has not been able to match that level at any time in the years since. Last year, the company booked $10.2 billion in revenue.
Making matters worse, R. R. Donnelly’s losses have ballooned at the same time. In 2012, the company’s net loss exploded to $651 million, marking the fourth year in the past five that the company has lost money.