I am veering from my personal preference of primarily recommending buying stocks in essential industries during the pandemic. I highlighted them in a dozen earlier articles. I recommend retail investors consider buying shares in middling Xerox Holdings Corporation (NYSE:XRX) for four notable reasons but there are concomitant cautionary signs that make XRX a gamble. Vegas has closed anyway.
Overall, Xerox appears wan and ghostly pale mixed among today’s high-tech fliers.
Source Seeking Alpha
The global company designs and produces equipment; it creates and markets workplace services, communications software, management, and digitization services along with printers, digital printing presses, graphic communications, and network administration in the cloud and on-server support services. These are the core activities of the business.
A Healthy Dividend Yield
XRX pays an attractive 5.4% dividend yield at around a share price of $18. An investor will get +6% if XRX is dragged down by a further downturn in the stock market. Seeking Alpha recently raised its rates on aspects of the dividend: the safety of the dividend is an A-, and consistency is a C-. A dividend cut is not expected but the possibility of a dividend increase is unlikely (D-), not at least until the COVID pandemic subsides and Xerox’s cash, revenues, and earnings start to replenish.
Source Simply Wall Street
Any threat to maintaining the current dividend yield is three-times sourced:
- The impact of the dramatic drop in all financial numbers reported for Q2 is directly traceable to the pandemic; it will pass as a threat to profitable business operations one day but quarters 3 and 4 are not likely to be much better.
- The Xerox core business of page printers and printing is flagging throughout the industry but the company is moving into business efficiency solutions and fields, including high-tech 3D printing.
- Revenues for the past six years remain steady though not growing but management still turns in a profit and adequate free cash flow.
Share Price Remains Stable For Now And Debt Covered
The second reason investors want to consider XRX is the current stability of the share price. It held steady through this past summer selling between ~$16 and $19. The Quant and Wall Street ratings are Neutral per Seeking Alpha, as are others. That is a plus sign in the company column for now but the price never followed the market higher. I do not envision any factors from operations that will precipitously cause a significant share price fall. Just to note, XRX spiked 30% in Nov ’19 when a hostile takeover attempt of HP Inc. (NYSE:HPQ) failed.
Xerox holds a debt to equity ratio touching 70% but it has been covered by operating cash flow and even reduced over the past five years. Xerox recently acquired about 25 companies (3 in 2020). The latest, Digitex Canada, was purchased in Mar ’20. Digitex provides printing, managed IT, and compliance management solutions for businesses.
M&A Or A Sale
Another plus for investors going forward is the apparent willingness of the board and management to consider buyouts and M&A for growth. Last December, Carl Icahn (NASDAQ: IEP) was the catalyst behind the HPQ bid. He owned shares in both XRX ($3.85B market cap) and HPQ ($26.4B market cap). He tried orchestrating a sale of HPQ to XRX. HPQ itself has undergone reorganizations after poor quarterly reports.
According to John Vincent, writing August 27, 2020, for Seeking Alpha, Icahn has disposed of his HPQ shares and the buyout efforts ended on a sour note. Since then, Icahn added more than ~2MK shares of XRX to his holdings reportedly in August ’20. With revenues at XRX dropping and no end in immediate sight for the pandemic, perhaps Mr. Icahn may pressure other shareholders to seek a buyer for XRX or another lofty merger? He is apparently not walking away from XRX and watching the company lumber along is not the style of this “corporate raider.”
Revenue is on a downward slope. Some look into the future projecting a leveling-off or turnaround but there are no particular reasons to assume so. There is plenty of competition in the Xerox marketplace. Xerox is in a labor-intensive industry and with H1-B visas rules tightening, Xerox and others will incur higher SG&A costs likely to negatively affect earnings.
Xerox’s growth and success have been dependent on customers having open and vibrant workplaces. Otherwise, there is scant need for most Xerox products and services. Q2 numbers enumerate what The Atlantic author, Juliette Kayyem, believes, “The coronavirus killed corporate culture. Get used to working from home.” The author’s assumption isn’t the only one. Managing Director of Fuji Xerox NZ, Peter Thomas, claims, “Twenty percent of print volumes have disappeared because of COVID and is unlikely to be recovered.”
A spokesperson for Xerox told me the company does not comment on SG&A, particularly cuts like possible closures of foreign facilities, but referred me to the Xerox statement that management is engaged in a “rapid response (of SG&A cuts) to the pandemic, which enabled us to deliver positive earnings and free cash flow in the second quarter.”
Xerox’s Vice Chairman and CEO summed up worrisome Q2 finances with this:
While the bulk of our markets were fully or partially shut down during the quarter, our team’s financial discipline enabled us to deliver positive earnings per share and cash flow while continuing to invest in key areas of growth.
Chinese and European suitors are unlikely to consider XRX with their own political and economic struggles underway. Japan’s Abenomics is keeping interest rates low, the value of the yen low, and has given impetus to an M&A spree of U.S. assets over the past three years. Perhaps the failed Fujifilm (OTCPK:FUJIF) merger/takeover talked about one year ago may be in the offing? If Mr. Icahn believes in putting shareholders first, marrying XRX and FUJIF is worth considering as a possibility.
New Directions For Revitalizing Sales
A fourth reason investors ought to positively consider XRX has to do with management’s move in new directions is to revitalize revenues and increase earnings.
Source James Brumley Chart
I contacted Xerox for more information on which key areas of growth the company is investing in. Management’s moves for future success are tied to digital innovation. It wants to become a leader making businesses efficient with automated management software. Xerox began moving in recent years to tech solutions like customized printing, digital document sharing, and 3D printing. For instance, I was referred to a piece by the Xerox Chief Tech Officer in Forbes by a Xerox investor relations spokesperson about 3D printing. Going forward, Xerox is building an additive manufacturing-focused 3D business division. Xerox is making acquisitions to speed up its initiatives, buying Vader Systems for its liquid metal technology and addressing high-speed plastics printing. Largely, this has been the focus for targeting buyouts of companies like Digitex and for bringing on new staff creating a 3D printing division within Xerox.
There does not appear any factor on the horizon, looking at operations, that will spark a share price increase much beyond where the price stands today. But neither is there much of a danger of any precipitous drop in the share price from operations. The print industry is struggling, annual revenues are down, and to complicate matters, workplace shutdowns caused the financial numbers of Q2 to be hit hard. They may not improve over the next two or three quarters. Yet, the healthy dividend yield, the current share price stability and debt management, M&A or sale potential, and management moving the company into new sectors combine to justify a gamble to buy the stock. It is a player in its industry as the SA ratings suggest.
This picture is courtesy Xerox. It is an image we will not see again for a long time. Notice anyone Xeroxing anything?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.