Look To Canon For An Excellent Yield And Upside

| About: Canon, Inc. (CAJ)

In the search for high yields, there are few areas of the tech sector that offer both a decent dividend yield and the opportunity for future growth. One part of the sector that has experienced hard times in recent years is the printer companies, some of which I believe deserve serious consideration for any dividend-seeking portfolio. My favorite name in the space right now is Canon (NYSE:CAJ), so let's take a look at why the company deserves a look, and we'll see why it may be a better risk/reward than some of the competition.

Canon's recent woes

Since the beginning of the year, Canon has fallen from about $40 per share to the current price of $30.60 as of this writing, a 23.5% drop. The stock has performed almost exactly opposite of rival Hewlett-Packard (NYSE:HPQ), which has gained almost 50% this year, even after the recent pullback.

There are a few reasons for Canon's fall. First, the printing business has fallen on tough times due mainly to a lack of incentive for people and businesses to buy new printers. It just so happens that I bought a new printer yesterday to replace my 2-year old HP Photosmart that died, and the new model is not that much different than the old one, save for a slightly larger LCD screen.

Canon also produces products in other struggling segments, which is the main reason for differentiation in performance from other printer manufacturers. Specifically, the camera business, which has been Canon's bread and butter for years, has suffered tremendously due to the trend of using smartphone cameras as one's primary camera. This caused a dramatic 34% year-over-year fall in Canon's earnings this year.

I do feel there is a place in the market for handheld digital cameras, and I do feel like smartphones are beginning to be fully absorbed in the market, so it is a matter of time before the two forms of cameras (separate and smartphone-integrated) come to an equilibrium. A lot of the decline was due to panic selling at such a drastic drop in camera sales, but I don't see the number declining much further.

Yield and value

The good news about the recent slide in the share price is that it produced a heck of a dividend yield, 4.93% to be exact (subject to change based on exchange rates). The company is projected to earn $2.47 per share this year, so the current dividend amount represents a 61% payout ratio. In other words, Canon is making more than enough money to sustain the current dividend.

In addition, the company's earnings are expected to rise by about 10% next year to $2.71, as a result of a weaker Japanese yen (good for American investors) and increased investment in new office products due to the improving economy. If the company does meet expectations in terms of earnings growth, I wouldn't be surprised to see the company raise the dividend proportionally.

The company trades for just 12.4 times 2013's expected earnings, which sounds pretty cheap before you consider the company's excellent cash position. Canon has over $8 billion in cash (almost a quarter of its market cap) and virtually no long-term debt, which reduces the multiple to just under 9.9 when you value the business alone.

Other options: HP, Xerox, Lexmark

There are a few other options in the printing business, but none that can really match the yield and value of Canon.

As mentioned, Hewlett-Packard has performed extremely well this year, and no longer pays an excellent yield like it did around this time last year. I was a huge advocate of HP not too long ago, but after the excellent performance, my attitude has switched to "wait and see." HP's turnaround is far from complete and in my opinion does not warrant such a gain in the share price.

Xerox (NYSE:XRX) has also outperformed, up about 43% in 2013, and yields just 2.3%. Xerox is perhaps in the best shape of the companies mentioned here in terms of its product lines and repeat customers. Also, over the past several years Xerox has shifted more towards leasing and servicing its machinery, which has proven to be more lucrative than simply selling it.

Lexmark (NYSE:LXK), a much smaller competitor at just about 5% of the size of HP, actually pays a pretty nice 3.2% yield. The company has adapted its business model, and is now more of a software and services company, and is already producing much better free cash flow than the company has seen in some time. The company is projecting to have $200 million annually in free cash flow by 2015, and if that happens I would expect significant dividend increases and share buybacks. Of the remaining companies on the list, Lexmark looks to be the best long-term value at the current price levels.

Canon's potential

While I know Canon is somewhat risky at the moment, with dependence on the shaky camera market, stagnant printing business, and volatile Japanese yen, I think that when the dust settles and cameras find their place in the new tech market, shareholders have a lot to gain. While you're waiting for that to happen, the company will pay you nearly 5% annually for your patience.

Disclosure: I 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.