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High Dividend 50: Xerox Holdings


Updated on January 19th, 2023 by Jonathan Weber

Xerox Holdings Corporation (XRX) is an American workplace technology company that offers a high dividend yield of slightly more than 6% at current prices. Shares aren’t cheap based on the expected forward profits, and Xerox’s recent results were far from compelling, which is why we do not deem Xerox attractive at current prices.

It is one of the high-yield stocks in our database.

We have created a spreadsheet of stocks (and closely related REITs and MLPs, etc.) with dividend yields of 5% or more.

Xerox is part of our ‘High Dividend 50’ series, where we cover the 50 highest yielding stocks in the Sure Analysis Research Database.

You can download your free full list of all high dividend stocks with 5%+ yields (along with important financial metrics such as dividend yield and payout ratio) by clicking on the link below:

 

In this article, we will analyze the prospects of Xerox Holdings Corporation.

Business Overview

Xerox was founded more than 100 years ago, in 1906, and is headquartered in Norwalk, Connecticut.

Xerox is a workplace technology company that designs, develops, and sells a wide range of business solutions in the United States and internationally. Its offerings include color and multifunction printers, digital printing presses, digital services for workflow automation, content management solutions, and so on. From a relatively hardware-focused company, Xerox has thus developed into a more diversified enterprise over time, adding software and services segments via organic expansion and via acquisitions.

In fact, non-equipment revenues are contributing the majority of Xerox’s sales today:

Source: Investor Presentation

During the most recent quarter, Xerox reported revenues of $1.75 billion, which was flat year over year, but up 5% in constant currencies. A strengthening US Dollar had a negative impact on reported revenues, however.

Around one-fifth of those revenues are generated via equipment sales, whereas the remainder is generated via what Xerox calls post-sale opportunities, such as servicing. These revenues are oftentimes recurring, which is why Xerox’s overall revenue is not very volatile.

Over the last year, quarterly revenue thus moved up and down only slightly, as the installed base provides a large recurring revenue stream that is not very dependent on seasonality or factors such as economic growth.

Unfortunately, Xerox didn’t perform well when it comes to profit generation during the most recent quarter. Due to higher costs, caused by inflation for materials, labor, and so on, Xerox saw its earnings-per-share decline from $0.40 in the previous year’s quarter to just $0.19 in the most recent quarter. Cash flows also suffered from weaker margins due to cost pressures that were not fully passed on to customers yet, although we believe that will happen in the foreseeable future.

Growth Prospects

Xerox is not active in a very fast-growing industry, but we still believe that the company will deliver very meaningful earnings-per-share growth over the coming five years, although from a below-average starting point due to 2022’s weak expected profits of just around $0.65 per share.

We do not believe that sales will grow dramatically going forward, as the industry is not growing meaningfully, and since Xerox generates the majority of its sales via post-sales business with existing customers anyways. With inflationary pressures easing and with Xerox raising its prices for customers over time, its margins should expand, however.

Due to the below-average profitability we see today, margin expansion could have a meaningful impact on profitability growth going forward. On top of that, thanks to the fact that Xerox does not need to invest heavily in new production capacity, the company can return most of its cash flows to the company’s owners. This is done via a combination of dividends and share repurchases.

Buybacks have lowered the company’s share count dramatically over the last decade, as Xerox’s outstanding shares dropped from 306 million in 2012 to just 155 million in 2022. This almost doubled each share’s portion of the company’s net profits.

Source: Investor Presentation

As we see above, Xerox has a healthy balance sheet with no net core debt. Shareholder returns should thus remain meaningful going forward, we believe. Between some margin normalization and a meaningful pace of buybacks, Xerox could deliver earnings-per-share growth of up to 15% a year going forward, we believe, which is why we expect that earnings-per-share will climb to $1.25 by 2027.

Competitive Advantages

Xerox’s industry is not growing fast, which is why it isn’t too attractive for new market entrants. Established players, including Xerox, control the market. Xerox benefits from a globally diversified customer base and from its focus on document management systems. On top of that, its healthy balance sheet can be seen as a competitive advantage.

That being said, the company has not capitalized on these advantages to a large degree, as its margins and return on capital aren’t especially attractive — the operating margin is only in the mid-single digits, for example.

Dividend Analysis

Xerox currently trades with a dividend yield of 6.1% based on a share price of $16.50 and an annualized dividend of $1.00. The dividend has been stable for the last five years, there has not been any dividend growth in that time frame. In 2016, Xerox had reduced its payout by 20%, thus the company is willing to end its dividend track record when necessary.

Based on this year’s expected profits, the dividend looks unsustainable, as the payout ratio is in the 150% range. That being said, we believe that profits will grow considerably in the coming years, as shown above. If that plays out, the dividend payout ratio could drop to around 80% by 2027 if the dividend is maintained at the current level of $0.25 per quarter.

There is no guarantee that the dividend will be maintained, but since considerable earnings growth is expected, and since Xerox has a balance sheet with additional debt potential, a dividend cut is far from guaranteed.

Overall, we believe that there is an above-average risk of a dividend cut, which makes Xerox unsuitable for investors searching for a reliable, low-risk income stock. The elevated dividend yield alone does not make Xerox an attractive income investment at current prices.

Final Thoughts

Xerox is not a very high-quality company. Its track record isn’t strong, as profits in 2022 were considerably lower versus 2012. The business growth rate over the last decade has been far from compelling.

Xerox’s cash generation has been solid in the past, which allowed for significant dividend payments and for ongoing buybacks. Today, the yield is at an attractive level of more than 6%. We nevertheless do not believe that Xerox is a good investment at current prices, as the valuation is elevated (Xerox trades for well above 20x net profits), and since the dividend does not look very safe — a dividend cut is possible, thanks to an elevated dividend payout ratio.

We thus believe that Xerox is not worthy of an investment today, as there are better picks available that offer significantly safer high dividend yields.

If you are interested in finding high-quality dividend growth stocks and/or other high-yield securities and income securities, the following Sure Dividend resources will be useful:

High-Yield Individual Security Research

Other Sure Dividend Resources

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