Every now and then, a company comes along that so completely revolutionizes a product line, it's very name becomes synonymous with that product… no matter who really makes it.
For instance, when I go to a diner, I still order a "coke" when I want a cola.
When I sneeze, I ask my wife to pass me a Kleenex… no matter what brand is on the box.
The same is true for today's featured company, Xerox (XRX).
For decades, Xerox was the only name in the world of copiers. Regardless of a copier's manufacturer, you weren't just making copies - you were "xeroxing." But times change and the electronic revolution has forced the world's leading "document company" to take on a major transformation. If the company does pull it off - investors could be making a lot of money. If it doesn't, well, Xerox could quickly become an also-ran.
Whether or not it succeeds has now become more relevant to income investors, since Xerox just announced a massive 35% bump in its quarterly dividend. It's the first time Xerox has increased its return of capital to shareholders since reinstituting the dividend back in December 2007. The dividend was eliminated after a breathtaking collapse in share price during the dot-"bomb" era. (Shares slid from $60 to $4 in roughly 18 months. Ouch.)
The new dividend will be $0.0575 a share, payable April 30 to shareholders of record as of March 28. That annualizes out to $0.23 a year, for an above-average yield of 2.81%. But if Xerox can't pull off its transformation, the dividend bump could be nothing more than a trap…
From Documents to Services
Xerox is focusing its future on designing and implementing business solutions across a broad spectrum of services from business to IT outsourcing and data processing, and from healthcare solutions to benefits management and customer relationship management for businesses and governments worldwide.
As the company website states, "Its technology, expertise and services enable workplaces… to simplify the way work gets done so they operate more effectively and focus more on what matters most: their real business."
That's a far cry from the copiers and printers that built the company. For Xerox to not just survive, but prosper, in the brave new world of information technologies, it needs to make these moves.
CEO Ursula Burns says the company's expanding services business will soon account for a full two-thirds of revenue by 2017, turning Xerox from a low-growth business into a high-growth one.
But this kind of transformation doesn't happen overnight. A sea change in business direction like this often means rough waters ahead. This became apparent in January, when the company released its fourth-quarter results. Revenue fell by 0.69% year-over-year. And EPS was down almost 10%.
Yet the shift to services appears to be working. Revenue from the services division grew by 2.33%, while the old line equipment division was down to a meager 17% of revenue. In fact, the services division now accounts for 52% of revenue overall. Additionally, XRX expanded its operating cash flow for 2012 by 31.57% to $2.58 billion. All good signs.
And with a P/E ratio of just 9.18, shares are reasonably valued.
Bottom line: Xerox could very well pull off this transition - and do it with flying colors. And while the increase in dividends is definitely a good sign, hold off for now. Watch for a few quarters of improving numbers and increasing dividends before committing any capital.