Xerox's Weak Quarter Is Brightened by a Dividend Boost

Xerox (NYSE: XRX  ) largely met analyst expectations when it reported its fourth-quarter and full-year earnings, missing revenue slightly, but matching earnings estimates. The quarter was expected to be fairly weak, with revenue declining year over year. But a decent dividend boost, supported by strong free cash flow, at least partly made up for it. Here's what stood out in Xerox's earnings report.

A look at the results
For the fourth quarter, total revenue fell 3% to $5.6 billion. This decline was driven by a 6% decrease in the document technology business, which includes commercial printers and copiers. Revenue from the services business was flat, and Xerox expects services to grow in the mid-single digits in 2014. Full-year revenue was down 1%, with services revenue growing by 3% compared to 2012.

Adjusted EPS of $0.29 for the quarter matched analyst estimates, with the full-year result of $1.09 in line with previous guidance. Xerox expects adjusted EPS to be between $1.10-$1.16 in 2014, with free cash flow of between $1.3-$1.5 billion.

The good and bad of services
As highlighted in my Xerox earnings preview, the segment margin in the services businesses is an important number to watch. The last few quarters have seen sequential declines, and the fourth quarter continued this trend. Services segment margin for the fourth quarter was 9.6%, down from 9.9% last quarter and 11.2% in the fourth quarter of last year.

While this continued decline is disappointing, there was also some good news in the services business. New business signings were up 5% year over year, and total signings in the trailing 12-month period rose by 21%. Along with a 92% renewal rate for business process outsourcing and IT outsourcing, growth markets like health care should help drive the services business back to growth in 2014 and beyond.

A solid dividend increase
Xerox delivered on a dividend increase. The company raised its quarterly dividend by 8.7% to $0.0625 per share, putting the forward dividend yield at around 2.25%. Xerox stated in its earnings presentation that it's targeting a gradual dividend increase over time, so annual percentage increases in the mid-single digits are probably what to expect.

Xerox repurchased about $700 million worth of its own shares in 2013, and it plans to buy back at least $500 million worth of shares in 2014. The total set to be returned to shareholders in 2014, through both buybacks and dividends, will be at least $800 million.

Xerox's balance sheet is steadily improving, and the company is targeting $200 million in debt reduction in 2014. Total debt now sits at $8 billion, but $4.4 billion of this is related to the equipment leasing business, and the company has $1.7 billion in cash reserves, up by $500 million from the end of 2012. The strength of the balance sheet, along with the strong free cash flow, will help support further dividend increases in the future.

The competition
One of Xerox's biggest competitors in both document technology and services is Hewlett-Packard (NYSE: HPQ  ) . HP's enterprise services business is larger than Xerox's, but as I pointed out in my earnings preview, Xerox actually generates greater profit due to HP's lackluster margin.

From an investment perspective, even though both companies trade at similar P/E ratios, Xerox appears to be a safer investment. While Xerox has two main business, one slowly declining and another slowly growing, HP is struggling to find growth anywhere. In fact, about 75% of HP's revenue comes from divisions that are in decline and unlikely to reverse any time soon.

Xerox is managing the decline of its document technology business, keeping margins high and wringing out as much profit as possible, while working to grow its services business in a margin-improving way. HP, while also generating considerable profit from its printing business, has struggled to both grow its services business and raise margins. Without growth in the services business, it's hard to imagine HP growing at all.

The bottom line
Xerox's quarter was mediocre, with revenue and earnings declining, but the company is positioned to continue to grow its services business as it takes advantage of increased demand in areas like health care. The declining services margin is something to worry about, but one of Xerox's main areas of focus is to improve this margin going forward. The stock declined a bit after the earnings announcement, putting Xerox trading at around 10 times adjusted EPS, a reasonable price given Xerox's prospects.

Looking for a big winner in tech?
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2819755, ~/Articles/ArticleHandler.aspx, 10/23/2014 3:41:49 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement