Updated on June 18th, 2024 by Nathan Parsh
High-yield stocks pay out dividends that are significantly more than market average dividends. For example, the S&P 500’s current yield is only 1.3%.
High-yield stocks can be very helpful to shore up income after retirement. A $120,000 investment in stocks with an average dividend yield of 5% creates an average of $500 a month in dividends.
Xerox Holdings Corporation (XRX) stock has a high dividend yield of slightly more than 7% at current prices. It is one of the high-yield stocks in our database.
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 stock.
Business Overview
Xerox is a technology company that designs, develops, and sells a wide range of business solutions in the United States and around the world.
Its offerings include color and multi-function printers, digital printing presses, digital services for workflow automation, content management solutions, and more.
From a relatively hardware-focused company, Xerox has developed into a more diversified enterprise over time, adding software and services segments via organic expansion and acquisitions.
As a result, non-equipment revenue contributes most of Xerox’s sales today:
Source: Investor Presentation
In the most recent quarter, Xerox reported revenues of $1.5 billion, which was a 12.4% decrease year-over-year and lower by 13.2% in constant currency. Foreign exchange translations helped the top-line by 80 basis points on a reported basis.
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 makes this revenue stream somewhat less volatile than equipment.
Due to higher costs caused by inflation, earnings-per-share declined from $0.49 in Q1 2023 to just $0.06 in Q1 2024. As a result, operating margin contracted 470 basis points to 2.2%
Operating cash flow declined $157 million, to a loss of $79 million. 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 near future.
Growth Prospects
Xerox is not in a growth industry, but we still believe that the company will deliver earnings-per-share growth over the coming five years.
We do not believe that sales will grow dramatically going forward, as the industry is not growing meaningfully. But with inflationary pressures eventually easing and with Xerox raising its prices for customers over time, its margins should expand.
Due to the below-average profitability we see today, margin expansion could have a meaningful impact on profitability growth going forward.
And 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 123 million in 2023.
This more than 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 limited 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 5% a year going forward, we believe, which is why we expect that earnings-per-share will climb to $2.49 by 2029.
Competitive Advantages & Recession Performance
Because the office tech segment is not growing at a high rate, it is not very attractive for new market entrants. In turn, the 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 low single digits, for example.
Xerox has also struggled during recessionary periods.
The company’s earnings-per-share throughout the Great Recession:
- 2007 earnings-per-share of $1.19
- 2008 earnings-per-share of $0.26 (78% decrease)
- 2009 earnings-per-share of $0.55 (112% increase)
Xerox’s earnings-per-share suffered a significant decline in 2008 before staging a moderate return to growth.
Earnings-per-share fell 60% in 2020 during the worst of the Covid-19 pandemic and the company has yet to establish a new high.
Dividend Analysis
Xerox currently trades with a dividend yield of 7.3% based on a share price of $13.66 and an annualized dividend of $1.00. The dividend has been stable since 2017 as there has not been any dividend growth in that time frame.
In 2016, Xerox had reduced its payout by 20%, showing the company is willing to end its dividend track record when necessary.
Based on this year’s expected profits of $1.95 for 2024, the dividend looks sustainable, as the payout ratio is projected to be 51%.
That said, we do believe that profits will grow in the coming years. If that were to occur, then the dividend payout ratio could drop to around 40% by 2029 if the dividend is maintained at the current level of $0.25 per quarter.
Of course, there is no guarantee that the dividend will be maintained, especially if earnings growth does not materialize. We do believe that the company’s bottom-line will improve by a mid-single-digit percentage rate over the next five years.
Conservative investors may find the company’s quality lacking, but the dividend is likely safe from being cut given future earnings projections.
Final Thoughts
Xerox is not a very high-quality company. Its track record is not strong, as the company’s earnings-per-share have not established a new high since 2019. 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 7%. Even better, the dividend looks safer today than it has in a very long time.
In addition, the valuation has become more reasonable at slightly more than 7 times expected earnings-per-share, so investors are not overpaying for the stock in our opinion.
For investors with a stronger appetite for risk, that yield could be enticing, making Xerox a buy at current levels.
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
- 20 Highest Yielding Monthly Dividend Stocks
- 10 Super High Dividend REITs
- 6 Highest Yielding Royalty Trusts
Other Sure Dividend Resources
- Dividend Kings: 50+ years of rising dividends
- Dividend Champions: 25+ years of rising dividends
- Dividend Aristocrats: 25+ years of rising dividends and in the S&P 500
- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 5%+ dividend yields
- Monthly Dividend Stocks: Individual securities that pay out every month
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more