Nokia Needs To Use Its Money Wisely

Oct.23.13 | About: Nokia Corporation (NOK)

Lately, there are a lot of discussions about how Nokia (NYSE:NOK) should use its newly-found money. Some people claim that Nokia should initiate a massive buyback, while others argue that a special dividend would serve the investments the best. Some people even suggest that the company should go on a shopping spree and make some acquisitions already. Honestly, I believe that Nokia needs to be very conservative with its money rather than spending it just to make some people happy.

Once Microsoft's (NASDAQ:MSFT) acquisition of Nokia's mobile phone business is voted for by the investors and gets finalized, Nokia will have about $11 billion in net cash (in other words, the company's total cash minus its total debt). A lot of people expect Nokia to be fully profitable starting next year, and they don't believe that the company should hold onto its cash. The fact is, we don't know how well Nokia will perform next year. Nokia's networking business was profitable in 2012 but it was unprofitable for every other year since being established and there is no guarantee for it to be immediately profitable.

Recently, This Point's hedge fund manager Dan Loeb announced that he initiated a large position in Nokia and he was hoping a special dividend or another form of cash payout. Nokia will be probably tempted to come up with a special dividend because it used to be a regular dividend payer until last year and it had to cancel paying dividends due to the financial troubles it was experiencing. Now, the company's management will be pressured by many investors in and outside of Finland for a special dividend or reinstatement of the old dividends.

I would have no problem with a dividend plan like Statoil (NYSE:STO) or many other European companies where a portion of each year's profits (about 30%) are devoted to dividends. In this plan, if a company is highly profitable, its dividend payment will be higher, and if a company lacks profitability, dividend payments might be smaller or non-existent for that year. This makes dividends highly volatile and this practice is very unusual in American companies. American companies tend to have more stable and predictable dividend payments that may change very little from year to year. As I said before, I would be fine with a dividend plan where Nokia shares a portion of its profits with its investors (which implies that a dividend payment will be made only if the company is profitable at the end of a given year).

One-time large dividend payments hardly accomplish anything. These payments usually attract investors that are looking for a quick buck, and those investors sell their shares as soon as they get their dividend checks. As a result of this, companies can see their share price spike up for a few days, but the effect will be very limited and not worth spending Nokia's cash.

I also don't like the idea of Nokia buying Alcatel or another unprofitable company. When Nokia sold its unprofitable mobile phone division to Microsoft, a lot of investors were cheering because the company would be more profitable in the absence of its cash burning business unit. On the other hand, the same investors are also cheering the possibility of Nokia acquiring Alcatel, which is in a worse financial position than Nokia's mobile phone division was. Why would Nokia buy another unprofitable business and hurt its future profitability when it barely got rid of its mobile phone division? It makes no sense to me. Nokia needs profitable lines of business.

Then what's the best use for Nokia's current cash? There are multiple uses for Nokia's cash but the best one that comes to my mind is building new businesses that are going to be profitable. Nokia could diversify its portfolio by offering new products and services, or expanding its geographical reach. The company could also save its money up until 2015 and start a new mobile phone business. According to the agreement between Nokia and Microsoft, the company will be able to sell Nokia-branded mobile phones after 2015. Given that it would take about a year to design and produce a new phone product, Nokia could start this as early as 2015. The company could also invest in other hardware. Currently, technology giants are racing each other to dominate the living-room-experience and Nokia could try itself out there.

For technology companies, opportunities are usually limitless and there are always some fun projects to invest money in. Nokia currently has a busy pipeline, particularly in its mapping business. The company has several partnerships going on with the leading car companies in the world, and I expect a lot of exciting products to come out of these partnerships which will eventually lead us to self-driving cars.

Nokia's net cash position will account for about 40% of its market value next year when Microsoft's payment arrives. Basically, even if the company generates about $1 billion per year in profits, its after-cash P/E ratio will be as low as 16.

In conclusion, Nokia shouldn't be in a hurry to return cash to investors at the moment. The investors have already profited nicely in the last few months as the company's share price doubled. Currently, the company's main priority should be to come up with a feasible business plan and explore areas of growth whether it is in shape of new products or new geographical areas. While I sold my shares into the rally that followed Microsoft's announcement, I am almost ready to jump back in the Nokia ship as I see a lot of future in the company.

Disclosure: I am long MSFT, STO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.