The Hair Pulling Move By Nokia

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 |  About: Nokia Corporation (NOK), Includes: AAPL
by: Gutone

In Nokia's (NYSE:NOK) annual general meeting on May 3, the company decided to pay a dividend of 0.2 Euro per share for 2011 and initiate a repurchase of up to 360 million Nokia shares. I find this decision hair pulling, given that the company's profit margin has collapsed, and it is losing money.

If anything, Nokia's current cash pile is an important asset to see the company through difficult times. It can be used for at least three other purposes, all of which would generate better long term returns for the company and its shareholders:

1. Promote future products better

As I have pointed out in this article, Lumia 900's promotion plan left a lot of desired. Not to compare with iPhone, the industry leader, even Motorola's Droid Razr Maxx received far better market response from consumers than Lumia 900. The only conclusion one can draw is Nokia's flagship in its turnaround plan, Lumia 900, could have been better promoted. If the phone receives an "A" grade, its promotion plan is "C" or "D".

Click to enlarge
Search volume: red line Droid Razr Maxx, orange line Galaxy S II, blue line Lumia 900

2. Improve product lineup

Because cell phones in the United States are all heavily subsidized by service providers, devices almost always cost far less than their true market price, upon signing a long term contract. Because every device is relatively cheap, when Americans make a purchase, what matters most is the top of line products. For this reason, concentrating on only one product is the right strategy. Nokia was right to focus on only Lumia 900 (not the other lower end Lumia's) in the United States. For the same reason, Samsung heavily promote Galaxy S II, and Motorola heavily promoted Razr Maxx.

However, there are two additional things: first, in overseas market, the low end products of Lumia line seems weak, with only two million unit sales from Q1 2012. Second, in America, Nokia doesn't have a lower end product to pick up market share from more price sensitive buyers. In order to compete with Apple (NASDAQ:AAPL), a wider product line is a necessary first step -- as Apple can use a one-product-fits-all strategy, the underdogs all have to do more market segmentation and targeting by selling differentiated products. In the near future, Nokia will need far more devices running Windows 8.

3. Keep the cash on book as a safety net

Both S&P and Fitch have downgraded Nokia's bonds to "junk" grade lately. It wouldn't hurt to have a little bit more cash on hand, instead of throwing it out when the company needs it most.

A more concerning issue is Nokia doesn't seem to see its current situation as urgent enough, since it is still handing out dividends and repurchasing shares. What shareholders should be more concerned about i what's reflected by the decision: are Nokia executives not able to to make unpopular but necessary decisions (such as suspending the dividend)? It's almost guaranteed that more tough decisions will come. Lacking such leadership, Nokia's trouble is far from only its products.

So, what should Nokia shareholders do? The strong hands may perhaps hang in there. Interested buyers like me would certainly grow a bit more hesitant, watching a little longer for what is to come. Patience.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.