XRX - Xerox: A Tech Giant Worth Buying With Close To 7% Dividend Yield

2023-07-10 11:04:02 ET

Summary

• Xerox gets a strong buy rating today.
• Positives are near 7% dividend yield, strong financial condition of company, macro effects driving tech spending, low valuation, and buying price range.
• Risks of a recession are not 100% clear yet and should not have too much effect on this firm.

Research Brief

As markets were closed for the Independence Day holiday in the US on July 4th, our research analysis took some time to research a well-established American brand, Xerox ( XRX ), as we take a break from our recent financial stocks and jump back into the tech sector.

According to its website , the company's business is not only focused on printers.. what is brand is traditionally known for.. but also a series of other workplace solutions including managed IT solutions, document services, among other things.

Also notably to mention, its next quarterly earnings results is estimated to come out July 25th, which we will keep an eye on.

Our Rating Methodology

Our goal is to find value buying opportunities for stocks in the financial & tech sectors, for companies that otherwise have strong financial fundamentals.

We individually rate 5 categories: share price trend, valuation, dividends, financial condition of company, macro factors affecting company.

If we recommend a stock on at least 4 of the 5 categories it gets a buy rating, 3 out of 5 is a hold rating, and less than that is a sell rating.

Share Price in Target Buying Range

Next, let's talk about the stock price at market close on Friday July 7th, which was $15.10:

In this chart, I am tracking the price in relation to the 50-day SMA (blue line) and the 200-day SMA (red line). After the death cross formation in April, the 200 day has mostly provided an upper resistance to the price. My target buying range as a value buyer would be somewhere between $14.00 and $15.10, as I highlighted in yellow. My portfolio strategy is to find these bearish price trends where the price is below both the 200 day and 50 day averages.

In this case, I would recommend this stock as a value buy, if it stays in that price range.

P/E & P/B Valuations Beat the Sector Median

Using Seeking Alpha valuation info , I will next discuss valuation metrics for this stock. I will solely use GAAP-based forward price to earnings (P/E) and price to book (P/B) ratios.

Notable items to mention which grab my attention as an analyst is that is the forward P/E of 7.63, which is almost 70% less than the sector median, and got an A+ grade from Seeking Alpha. In addition, the forward P/B of 0.64 is 85% less than the sector median.

Based on the category of valuations, I would recommend this stock.

A Near 7% Dividend Yield

According to Seeking Alpha dividend data , the current dividend yield for Xerox is 6.62%, with a dividend of $0.25 and most recent ex-date of June 29th.

Its dividend growth in the last 5 years has not impressed, however, with the 2022 annual dividend of $1 being the same as in 2018, after it dropped from the 2021 level of $1.25.

To compare dividend yields, I am picking two peers that also provide technology hardware and printing solutions, HP ( HPQ ) and Dell Technologies ( DELL ). The dividend yield for HP is 3.42%, whereas the dividend yield for Dell is 2.51%.

This makes Xerox highly competitive on dividend yield compared to two other major tech stocks, so I in the category of dividends, I would recommend this stock.

Financial Condition of Company is Vital

To consider any notable items in the financial condition of Xerox, we will use the Q1 results with a focus on items from the net income, balance sheet, and management commentary.

In terms of capital health, the Q1 results show free cash flow of $70MM, up $20MM YoY.

On the profitability front, notable items were adjusted EPS of $0.49, up $0.61 YoY, and an adjusted operating margin of 6.9%, up 710 basis points YoY.

Its balance sheet shows positive equity going back towards 2021, and its most recent cashflow statement showed positive metrics on free cashflow per share.

So, I would recommend on the basis of financial condition.

Macro Effect is Positive for this Firm

Unlike another sector I cover on this site, the financial sector such as banks and insurance companies that benefit from Fed rate hikes leading to higher interest rate margins, being that Xerox is in the tech sector its primary income driver is not interest income but selling various tech solutions & products to its clients worldwide, so both its clients are facing higher costs of borrowing but also Xerox is also.

However, the tailwind I think that could be in its favor is stable demand for technology solutions at a macro level.

Consider that, according to Xerox CEO Steve Bandrowczak in his Q1 management commentary :

Despite a challenging macroeconomic climate, demand for our equipment and services remains resilient and is supported by service offerings that help our clients mitigate current macro headwinds like higher inflation, labor shortages, and tighter liquidity conditions.

This positive outlook is a good tone to set, however lets deep dive into the 2023 outlook for tech spending, based on this chart from Statista I will use:

This chart gives some overview into the positive trend for spending on tech services. Therefore, I would recommend this stock when it comes to this category.

Rating Score

My rating score is a strong buy today, which is actually more bullish than the consensus from SA analysts, Wall Street, and the SA quant system:

Risks to our Rating Outlook

A risk I can identify to my bullish outlook on this stock is all the talk on the Street about recession potential for 2023, driven by overly high interest rates. This could affect Xerox in the consumer and small business segment, who may decide to curb some of its spending on tech.

However, not so fast. Let's not buy into the recession hype too much just yet. I think there is not adequate consensus across the board for a definite recession and when it will appear.

A recent July article in Markets Insider cited economist Paul Krugman's take on the issue, which is encouraging to my argument:

'US economic news has been increasingly encouraging: falling inflation, no sign of a recession,' the economics professor at the City University of New York tweeted in late June.

So, I think that Xerox is well positioned right now to face this risk.

Analysis Wrap-up

To reiterate, I am rating Xerox a strong buy today.

Its positives are: dividends, valuation, price chart, financial condition of company, and macro factors helping the tech sector.

A potential risk to a tech company exposed to the consumer space is a potential recession, however there is not a definitive across the board consensus for that right now.

The Q2 earnings release season is here now that July is underway, so I look forward to the next release from Xerox, which I believe will be either in line with or slightly better than its Q1 results.

Although I don't like all tech stocks, once in a while I like to add to my watchlist one that shows fundamentals, and this is one of them.

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