Nokia (NYSE:NOK) recently announced that it will be getting rid of its dividend. The company has been paying a dividend for the last 20 years. Nokia reported a profit of $269 million due to cost cutting and an increase in shipments for its Nokia Lumia phones.
While a cut or a loss of a dividend is usually a bad sign, this announcement will actually help the company, and could calm shareholders. Last year, the company paid out nearly a billion dollars in dividends to shareholders.
Nokia will begin to see its cash balance grow and its leverage ratio fall due to savings from distributions. The company had $3.5 billion in cash and long-term debt was more than $5 billion. An additional $1 billion in savings per year will help the company achieve a cash reserve larger than its total debt over the coming years.
Nokia has had a particularly tough time due to lagging sales, and mounting losses have brought concerns over liquidity issues. While the company still has plenty of cash left, continuing losses will keep bringing down its reserve.
While Nokia earned a net income of $200 million last quarter, the company had a net loss of more than $900 million each quarter for the year.
Last year, Raymond James downgraded Nokia over liquidity concerns and its convertible offering. Raymond James became concerned that Nokia will have to continue to dilute shares in order to help cover maturities. With the announcement of a dividend cut, shareholders will not have to worry about dilution.
Nokia is trying to become a more efficient company that can effectively compete with competitors such as Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) in the smartphone market. I believe the company will cut down on losses and will see marginal profits going forward. With a net profit and lack of a dividend, concerns over liquidity are over. This will allow management to focus on growing sales without having to worry about a time crunch.