Bull or Bear When Nokia Cuts Dividend?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Nokia (NYSE: NOK) has recently decided to cut its dividend for the first time in more than 140 years. When a company cuts dividends, investors tend to be pessimistic about that business. However, in some cases a dividend cut has proven to be a smart move and benefit shareholders in the long run. Should investors be bearish on Nokia after its dividend cut?

The Fallen Angel

Back in the first quarter of 2008 Nokia was the top handset maker, with more than 45% of market share, whereas Apple (NASDAQ: AAPL) had around only 5% market share. However, in the third quarter of 2012 Nokia was no longer in a list of Top 5 global smartphone company. Apple became the second biggest player in the smartphone industry with a 15% market share, while BlackBerry (NASDAQ: BBRY) ranked third with 4.3% share of the total global smartphone market. Keven Restivo, IDC’s senior research analyst, commented, “The company's transition away from Symbian-powered smartphones to ones shipped with Windows Phone has left ample opportunity for rivals to steal share away from Nokia over the past 18 months.” Nevertheless, he also noted that there was still more room for different players, including Nokia, to prosper. 

Full Year Results

For the full year 2012, Nokia generated €30.18 ($40.63) billion in revenue, 22% lower than the €38.66 ($52.05) billion in revenue last year. Smart Devices net sales declined 50%, from €10.82 ($14.57) billion in 2011 to €5.45 ($7.34) billion in 2012. The net income came in at €2.3 ($3.1) billion, or €0.84 ($1.13) per share. The company said that the decline in the smart device sales was due to the increased general market competition and Nokia’s transition from Symbian devices to Lumia devices. In the fourth quarter, the company sold 4.4 million Lumia phones, bringing the total Lumia phones sold to 13.4 million in 2012. 

Trying to Raise Cash for Reinvestment

As of December 2012, Nokia had nearly €8 billion ($10.93 billion) in total stockholders’ equity, more than €5.5 ($7.5) billion in both short-term and long-term debt, and only around €9.9 ($13.33) billion in gross cash. However, after paying €1.5 ($2) billion in restructuring and €750 million ($1 billion) in dividends, Nokia was left with €4.4 ($5.92) billion in net cash.

Nokia’s cash amount is quite small compared to Apple’s cash position of $137 billion. Trailing twelve months, Apple has paid nearly $5 billion in dividends. BlackBerry has only $2.9 billion in cash, but it hasn’t paid any dividends. The dividend cut would allow Nokia to reinvest the business. Timo Ihamuotila, Nokia’s CFO, commented that Nokia would sell its non-core assets when there were decent opportunities--in fact, Nokia has also raised an additional €170 ($222) million by selling and leasing back its headquarter. By adopting the Windows operating system, Nokia has been gradually coming back to compete with Android’s phones and iPhones.

Blackberry and Apple are More Innovative

BlackBerry is also coming back with its own Blackberry 10 operating system. The new Blackberry Z10 phone has been reported to have strong pre-orders and pre-registrations. Analysts at TD Securities mentioned that the Blackberry Z10's sales were better than they expected them to be. Some iOS and Android users were turning to the new Blackberry. From a different aspect, Blackberry is considered a global innovation leader. According to Intellectual Asset Management,  both Blackberry and Apple were in the top 14 companies which had at least 3,400 US patents. For Apple, two analysts of Piper Jaffray mentioned that Apple might launch as many as 5 new products soon, including Apple Radio, iPad mini with Retina display, iOS 7, iPhone 5S, and Apple Television. 

At the current price of $16 per share, Blackberry is worth $7 billion. The market is valuing Blackberry at only 3.55x EV/EBITDA. Apple, with $429.5 billion in market cap, is a bit more expensive at 6.58x EV/EBITDA. Nokia had a negative LTM EBITDA, so the EV multiple is not valid. 

I’d Rather Wait

Nokia has been trying to turn itself around, and we are seeing some positive signals. It has raised more cash for reinvestment in several ways, including a dividend cut, the headquarter sale, and bond issuance. However, technology changes fast, and we never know what the trend will be and who will ultimately benefit in the future. I would rather wait to see further developments before initiating any positions.


hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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