Xerox Tries to Dazzle Investors with Buybacks, Higher Dividends

Transforming Xerox to a services-led business — now accounting for more than half of our revenue — is creating a strong foundation for Xerox’s future. … With a clear view on the market trends in our industries, our focus is on delivering operational improvements that expand margins, increasing our base of recurring revenue and generating strong operating cash — all of which deliver long-term value for shareholders and sustainable success for Xerox.

Xerox shares have lost nearly half their value since reaching a peak in late 2010, about six months after Burns was named chairman, adding to the CEO mantle she had assumed the year before. Taken as a whole, shares are up about 3.5% since Burns was named CEO in 2009. That is not very exciting.

But the company is trying to light a fire under investors today, by announcing that earnings will increase by 10% in 2013 on revenue that will be flat to up 2%. Based on expected 2012 revenues of $22.4 billion, a 2% jump would put revenues around $22.85 billion. Xerox expects GAAP earnings per share (EPS) in the range of $0.94 to $1.00. Adjusted EPS is forecast at $1.09 to $1.15. The consensus estimates call for EPS of $1.12 on revenues of $22.62 billion.

Profits and revenues are within analysts’ estimates, so what else is new? The company has added $1 billion to its share repurchase plan and expects to allocate at least $400 million to share buybacks in 2013. In 2012, the company expects buybacks to total $900 million to $1.1 billion.

But wait, there’s more. Management is seeking approval to raise the dividend from $0.0425 to $0.0575, an increase of 35%, beginning April 30, 2013.

Now the bad news. The company expects to take a $100 million restructuring charge in the fourth quarter, which will lower quarterly EPS by an estimated $0.05 per share. The restructuring is “primarily focused on improving cost efficiencies in the company’s services business.” Wasn’t that the business that was saving Xerox?

Xerox paid $6.4 billion for services business Affiliated Computer Services in 2009 and in the third quarter of 2010, services accounted for more than half of Xerox’s total business. Which is exactly what Burns is saying the services business is bringing in today. Buying back shares and raising dividends cannot disguise the weakness.

Employees will be lose their jobs, perhaps as soon as today. Xerox has not specified what the $100 million in restructuring charges is going to pay for, but it does not take a genius to figure it out.

Xerox’s shares are down about 1.3% in premarket trading this morning, at $6.25, a new 52-week low if it holds. The current 52-week range is $6.29 to $8.84.

Paul Ausick