Question No More, The Dividend's Toast
Reuben 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) finally made the hard call and eliminated its dividend. It was a long time in the making, with a lot of small, but notable, warnings along the way. While it is, indeed, a sad day for the company and its loyal shareholders, this decision might just be an important step in the healing process.
Time Moves On
Nokia was once the dominant cell phone handset manufacturer. It had massive market share and a powerful brand image. Moreover, it held a leading position in emerging markets, where growth was, and is, expected to be material over the coming years. It was at the leading edge of the cell-phone boom.
However, it pretty much missed the smart phone boat. This has turned Nokia from a leader to an also ran in developed markets, lagging far behind Apple's (NASDAQ: AAPL) iPhone and the many handsets supporting Google's (GOOG) Android platform. Indeed, while Apple was cementing its position as the dominant smart phone maker, and Google was copying Apple's best features, Nokia was working on a smart phone operating system that it eventually threw away.
Although Apple's penchant for trying to tightly control every aspect of its products is starting to look like a big liability, Google is still running strong. To take on this duo, Nokia began working with Microsoft (NASDAQ: MSFT) in an attempt to turn the tide. The thing is, Nokia has much more at stake with this partnership than Microsoft, and the outcome is no slam dunk.
A Dividend Cut is Never a Good Thing
While Nokia has material issues to deal with, its financial position isn't particularly bad. True, it is bleeding cash and posting bad earnings results, but it has the financial resources to live through an extended period of transition. So, it can afford to keep going down its current path with Microsoft in an attempt to earn its way back into the big leagues. However, it is hard to justify a dividend when you aren't making any money and spending heavily on getting back in the game.
"To ensure strategic flexibility, the Nokia Board of Directors will propose that no dividend payment will be made for 2012 (EUR 0.20 per share for 2011). Nokia’s Q4 financial performance combined with this dividend proposal further solidifies the company’s strong liquidity position." You can't argue with the logic, but it still stings. However, it comes after earlier cuts, which is part of what gives the cockroach theory (where there's one, there's more) validity.
Reason to be Hopeful
Now that the dividend cut is out of the way, investors can focus on Nokia's long-term prospects. For example, Nokia still has impressive market share in emerging markets, but its stronghold is among price sensitive consumers. While this is likely to keep the company relevant for many years, it isn't going to lead to growth.
Apple has been chided for not having a lower price option for such price sensitive customers. While Google's Android is found in phones all along the price spectrum, Nokia and Microsoft's new phones have been receiving positive reviews. Though too early to tell if they will be a financial hit, they could easily be used as the template for a solid emerging market smart phone.
As far as the duo's phone in developed markets, the Lumina, as it is called, drove a 240% quarterly increase in sales in North America, as compared to the same period a year ago. That's a pretty positive market response, putting some healthy numbers behind the solid reviews of the phone. While Nokia isn't likely to unseat Google or Apple, it could easily launch Microsoft into the third spot in the smart phone operating system war. That, in turn, would position Nokia well, too.
Nokia is no longer a dividend play. Now it is a turnaround play through and through. It's got a well-heeled and powerful friend in Microsoft and a great brand name. Add the company's notable exposure to emerging markets, and there is a compelling reason to take a risk here. The low share price, meanwhile, makes the stock a prime option for an investor's “fun money.”
ReubenGBrewer has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. 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!