If investors want to read a really upbeat self-promotional press release meant to encourage troubled shareholders, Xerox Corp. (NYSE: XRX) put out a great one last week. Solid financial position, a diverse portfolio, the achievement of many performance targets, and comments about its impressive size — billions in revenue?

Despite the company’s comments, the fact remains that Xerox has not grown since 2011. For four of the five years that current chief executive, Ursula Burns, has been at the helm of the company, earnings have shrunk year after year. 2011 saw earnings of $1.33 billion, which have fallen all the way down to $992 million. That is a 25% drop in four years.

Considering these facts, it is a wonder the stock is up 24% over the past five years. By comparison though, the broader S&P is up 94%. How is Xerox up at all, if earnings keep shrinking? Well, manufacturing capital gains in an ultra-loose monetary policy environment is not exactly rocket science. Stock buybacks are rampant these days, and no less so with Xerox.

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While there is nothing wrong with an occasional buyback program to benefit shareholders, in Xerox’s case it seems to be the only thing driving the stock higher over the past five years. In that sense, it is akin to equity cannibalism. Consider that in its cheery press release, Xerox announced an agreement:

… to sell its Information Technology Outsourcing (ITO) business to Atos for just over $1.0 billion prior to closing adjustments, enabling the company to use the funds toward its 2015 capital allocation strategy, which includes approximately $1 billion for repurchasing shares.

So Xerox sold off its ITO business and decided to use the entirety of the proceeds to support its stock price. One would think that investing in the growth of the company may be more important in the face of collapsing earnings.

Buybacks do have another smoke-and-mirrors advantage besides artificially supporting stock prices. They allow a company to claim higher earnings per share (EPS), even while core earnings continue to fall. Xerox’s adjusted EPS did rise 3% in 2014 after all, but with fewer shares, it tips the scales.

To their credit though, Xerox’s management was a bit more honest in its latest earnings call than the rosy picture it painted of its annual shareholder meeting. Chief Financial Officer Kathryn Mikells, for example, forecast second-quarter revenue growth and second-quarter margins to be flat, and she expressed disappointment with downward guidance revision.

The farthest that CEO Burns went out on her proverbial limb was to say that margins would pick up 10% to 12% in her tenure, but not in 2015:

That 25 basis points to 50 basis points [improvement in margins] will not happen. It will probably be a little bit of a headwind for us in 2015 not a tailwind.

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Much like Greece, one of Xerox’s biggest sticking points is its overly generous pensions for its bloated workforce. By the CFO’s own admission, increased pension expense is the largest driver bringing down operating profit for the company.

The big problem with pensions, of course, is that you cannot shrink them once you sign on the dotted line. So Xerox is stuck with both pension problems and poor financial performance.

By Rafi Farber

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