Nokia (NOK) has been hit hard recently with the shift to smart phones. This has driven the earnings and stock price of this Finland company down. However Nokia sold 82.3 million phones during the last quarter and sold more phones than Apple (AAPL) by 23.55 million. Yet investors are somewhat concerned about the company because Nokia's new Lumia smartphone has not yet gained traction.
The Lumia smartphone uses Microsoft's Windows 8 operating system. There are still questions whether this OS will be a winner in the marketplace. Furthermore there are able competitors making inroads into Nokia's cell phone business. Apple, Samsung (SSNLF.PK) and Research in Motion (RIMM) are successfully marketing smart phones that have taken market share from Nokia. Microsoft (MSFT), which is partnering with Nokia with the OS, may soon offer its own smart phone independently. Google (GOOG) is also offering its own smart phone, the NEXUS4, creating another possible strong competitor. These factors introduce a great deal of uncertainty about Nokia's cell phone business.
The financials for NOK show that the company is in fine financial shape. The balance sheet shows $12 billion of cash with $6.75 billion of total debt. The company has the finances to carry it through the changes in the marketplace and to develop smartphones that will get the company back to profitability. It may take a period of time for NOK to catch up to the competition, but they are moving quickly in that direction.
A recent article on NOK suggested that the company will eventually turn around its business and become profitable again. The author pointed out that NOK is restructuring and lowering costs. It also is doing well in its networking business and the mid-priced mobile phone called the Asha has been selling well in Asia. The author and other analysts do not expect the mobile phone business to be profitable over the short term, but expect it to become profitable in several quarters. One recent article maintains that NOK's stock is a buy at the present price because the author maintains that NOK has a viable dynamic business. A review of other recent NOK articles on Seeking Alpha indicates there are many authors with varying opinions on its stock currently.
While I am not yet convinced that NOK's stock is a good dividend holding, I am confident that NOK will be a survivor in the phone wars. NOK's current competitive struggle has negatively impacted the price of its bonds. This presents the investor who is willing to take on some risk an opportunity to get a good return on one's investment without being concerned about whether NOK will stop paying its dividend. Nokia has a bond outstanding that Fitch rates BB- and presently pays over 6% at the current price of $872. The bond's CUSIP is 654902AB1, matures on 5/15/2019 and pays 5.375% based upon the issue price of $1000.
My recommendation for the income investor is to buy the bond and to avoid the stock. If NOK makes a dynamic comeback, the stock will certainly reward one handsomely with capital gains, but if it does not, one may have dead money for a long time. The bond, on the other hand, continues to pay interest no matter what direction the stock goes even if it stops paying or lowers the dividend. If the company makes a dynamic comeback, the bond will quickly rebound to the issue price and offer some capital gains on one's investment although not nearly what the stock would offer. In my view, the bond offers a safer, better alternative for income investors until the picture clears on NOK's cell phone business.
A note of caution. Bond prices are not as readily available as stock prices. Bond traders often mark up the price of bonds and it is often difficult to get the market price on the bond one wants to buy. If you decide to purchase this bond, be prepared to negotiate with the broker and don't pay more than $875 per bond in today's market.
Additional disclosure: I am long on the NOK bond covered in the article.