Xerox (NASDAQ:XRX) has faced significant underperformance in comparison to the broader markets over the past two decades. While the S&P 500 Index has surged 340% since September 2003, XRX stock has fallen by 2.5% during this period, returning only 12% when accounting for dividends. As a result of this prolonged underperformance, Wall Street sentiment toward XRX has been overwhelmingly bearish.
However, there have been recent signs of strength in XRX stock. Over the past month, XRX has gained over 3%, while the S&P 500 has remained nearly unchanged over the same period. This has prompted some investors to reevaluate the stock and consider whether it may continue to rebound and potentially win over skeptics.
Xerox’s Q2 Earnings and Financial Improvements
Xerox is a workplace technology company that specializes in software and hardware solutions for enterprises. The company has been facing slowing sales growth and narrowing profit margins, with revenue declining from $9 billion in 2019 to $7.16 billion in the last 12 months. Additionally, adjusted earnings per share have fallen by an annualized rate of 20% over the past five years.
However, in the last year, Xerox has taken significant steps to strengthen its operational and financial discipline. Despite a challenging economic environment, the company reported another quarter of profitable growth in Q2 2023:
- Sales grew by 0.4% year-over-year to $1.75 billion.
- Adjusted earnings per share rose by nearly 50% to $0.44 per share.
- Gross margins improved to 34%, up from 31.9% in the same period the previous year.
- Cost optimization efforts led to an operating margin of 6.1%, a 410 basis point improvement over the previous year.
- Xerox reported an operating cash flow of $95 million, an increase of $180 million year-over-year.
- Free cash flow also grew to $88 million, compared to a cash outflow of nearly $100 million in the prior year.
Xerox has set ambitious targets for the future, including an operating margin between 5.5% and 6% in 2023, and a free cash flow of $600 million for the year.
XRX as a Dividend Stock
While Xerox ended Q2 with a total debt of $3.32 billion, which is considered relatively high, the company has been working on reducing its balance sheet debt by over $600 million in 2023. This reduction has significantly lowered interest expenses. Xerox aims to consistently generate cash flows for reinvestment in capital projects, debt reduction, and increasing dividend payouts.
Xerox’s dividend policy targets returning at least 50% of free cash flow to shareholders through dividends. The company currently pays a quarterly dividend of $0.25 per share, resulting in a yield of over 6%. With its current number of outstanding shares, Xerox’s dividend payments amounted to less than $40 million in Q2, indicating a payout ratio of less than 50%.
Analyst Expectations for XRX
Despite XRX’s recent improvements and attractive valuation, analysts have remained cautious. Of the three analysts covering XRX, one recommends a “hold,” while two have a “strong sell” recommendation. The average target price for XRX is $15.33, which is slightly below the stock’s current levels.
However, it’s worth noting that Xerox stock is currently priced at 4.2 times free cash flows and 10 times forward earnings, making it appear very cheap. Furthermore, the stock has performed well in 2023, gaining 19% after adjusting for dividends, which is in line with the S&P 500’s performance. Xerox has also consistently beaten consensus earnings estimates over the past three quarters. If the company continues to distribute 50% of its cash flows in dividends, investors may expect further increases in payouts in the coming months.
Featured Image: Freepik @ mutazfidely
Author Faith Yakubu 
