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Xerox Holdings (XRX) cut its dividend because of weakness in its end markets. Demand for copiers, printers, and document management solutions is declining. In turn, this has resulted in lower revenue and profitability. Because of changing customer and business needs, these trends are unlikely to reverse soon. The firm dividend was held constant since 2018 before the reduction. 

The company’s end market challenges have caused the share price to drop substantially from its peak in 1999, from which it has not yet recovered. In the past year, the share price fell as investors sold this dividend stock because of worries about when their end markets will recover, and a potential dividend cut as safety decreased. Another cut may occur in the future, depending on business conditions.

Overview of Xerox Holdings 

Xerox Holdings was founded in 1903 as the Haloid Photographic Company in Rochester, New York. Today, it designs, manufactures, and sells printers and copiers and provides document management solutions and IT services globally.

The company operates in three segments: Print, Other, and FITTLE. The company’s Palo Alto Research Center (PARC) is famous for inventions related to personal computing. The lab was donated to SRI International in 2023, with Xerox benefiting from a preferred research agreement.

In the last twelve months, total revenue was $6,070 million in 2024.

Dividend Cut Announcement

In an announcement about the Lexmark International acquisition on Monday, Dec. 23, 2024, Xerox Holdings reduced its dividend payout. The company’s quarterly dividend rate was $1.00 per share before the announcement. The dividend is now $0.50 per share, a 50% reduction. In the press release on Dec. 23, the announcement stated,

“In conjunction with this financing, the Xerox Board of Directors approved a change in the dividend policy to reduce the Xerox annual dividend from $1 per share to 50 cents per share starting with the dividend expected to be declared in the first quarter of 2025. This lowered dividend payment provides incremental capacity to reduce debt while continuing to reward shareholders with an above-market yield.”

Later, in the earnings call transcript, the company stated the following:

“As noted during the Lexmark acquisition conference call, our primary capital allocation priority is now the repayment of debt, and we plan to return cash to shareholders via an annual dividend of $0.50 per share.”

Effect of the Change

By executing a 50% dividend cut, Xerox desired to lower its dividend to provide financial flexibility after the Lexmark International acquisition. The dividend has been constant since 2018, so the company did not have a streak of increases. The result is less free cash flow is required for the dividend payout, freeing tens of millions of dollars for de-levering.

Challenges

Xerox is facing a challenging business environment because of declining global sales, margins, and earnings.

Organic Growth

The company’s organic sales growth is negative because of structural challenges. Its main business is selling copiers and printers and document management solutions, which is in decline. Consumers and enterprises require fewer copiers and printers because of networked services, the cloud, and outsourcing. Hence, demand is impaired and unlikely to turn around.

Debt and Leverage

Xerox has been cutting costs to reduce expenses and cash flow requirements. However, it has also used debt to acquire ITsavvy, an IT solutions provider. The firm is also acquiring Lexmark International for $1.5 billion in debt. Both acquisitions are likely accretive and will help increase revenue, cash flow, and earnings per share. Also, Xerox was seemingly using some debt for share repurchases in the past.

However, total and net debt and leverage will rise substantially because of the M&A. At the end of 2024, the leverage ratio was ~5.8X. Xerox obviously needs to reduce leverage, especially considering its debt is rated speculative.

Lack of Focus

Notably, Xerox’s struggles have been seemingly amplified since late 2019 and the COVID-19 pandemic. The firm pursued an M&A deal for HP Inc (HPQ) that was rebuffed. However, even before that, Xerox attempted a deal with Fujifilm, which was eventually scrapped. These deals seemed at odds with Xerox’s need for operational focus and likely diverted attention away from improvements.

Dividend Safety

Xerox’s dividend safety was declining because of lower revenue and earnings per share. Earnings per share peaked in 2015 at $3.92, but declined drastically to $0.97 in 2024. However, they are expected to increase to $1.07 per share in 2025 on acquisitions and cost savings. 

(Click on image to enlarge)

Source: Portfolio Insight

As a result, as seen in the chart below, the dividend yield climbed rapidly to over 12%, significantly more than the five-year average of 6.2%. A value above 10% is typically associated with a company in distress. After reducing the dividend by approximately 50%, the anticipated forward dividend yield is around 6.3%. The quarterly rate is $0.125 per share. However, the yield is still higher than the S&P 500 Index’s average.

(Click on image to enlarge)

Source: Portfolio Insight

The annual dividend now requires about $62 million ($0.50 yearly dividend x 124 million shares), compared to $141 million in 2024. In addition, based on consensus 2025 estimates of $1.73, the forward payout ratio will contract to around 48%. We expect the annual difference in cash flow requirements to be used to de-lever and improve the balance sheet.

Although the dividend is in a better position and more secure now, the leverage ratio and net debt will be elevated. Xerox is in the bottom percentile of dividend stocks tracked. We view the equity as at risk for another dividend cut.

Final Thoughts on the Xerox Dividend Cut

Xerox’s best days are obviously behind it. The firm’s copier and printer products have less demand because of business changes. It is unlikely that demand will increase in the near-term. Although the ITsavvy and Lexmark purchases will improve the firm’s financial position, long-term operational execution is critical. That said, declining sales, margins, and earnings have been severe. As a result, Xerox cut its dividend.

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