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Nokia (NOK) is had a tough couple of years. The smartphone market has largely been dominated by Apple (AAPL) and Google (GOOG). Nokia has seen market share fall and has been placing a whole lot of emphasis on the future of the Lumia 900.

The stock is still risky at this point, but many still believe that Nokia has the potential for a turnaround. However, there seems as if there is pretty good chance that the stock could continue to fall. So for those that want have a lower risk appetite, but want to take part in a Nokia turnaround, the bonds may be a much better play.

Nokia's 5.375% bonds are set to mature in 2019. Currently, the bonds are trading at 79 cents on the dollar. The company is paying $5.375 per $100, but the bond is trading under par. So the yield on cost for the bonds is around 6.8% ($5.375/79). Many of you may be wondering why the bond is a better buy considering the stock yields more. The bonds are better because they are higher up on the food chain. There is a very good chance that Nokia will stop payment on the common stock dividends if losses continue.

Nokia's management has obligation for the bonds, but dividends are not a requirement for the common shareholders. The other reason the bonds are better is because even though Nokia is having problems, the company's balance sheet is still fairly strong.

Nokia has around $6.46 billion net in cash. The total amount of the 2019 bonds is $1 billion. So based on a 5.375% interest rate, Nokia pays around $53 million a year for them. A $6.46 billion buffer is more than sufficient enough to cover bond payments.

If we make our analysis more conservative, there is a possibility that Nokia's losses would start burning cash on the balance sheet. Even if Nokia's $6.46 billion net reserve falls to $3 billion, that's still more than enough to cover the company's bond payments. There is a chance that losses could be greater than what we are expecting, but its still important to note that Nokia's assets to liabilities is 1.5. So Nokia could potentially mark down its assets in sale and still fully cover its liabilities.

To be honest, I don't see Nokia engineering a strong turnaround. The stock is way too risky at this point and the dividend is more than likely going to be cut if losses continue. However, the bond is a obligation that the company must cover. $53 million in interest is very little for Nokia considering the strength of the balance sheet. The bonds are a great buy as there is plenty of cash on the balance sheet. This is important for bondholders as it will insure interest payments will come through for the foreseeable future. In addition to this, the bonds are trading at a nice discount. Investors should consider purchasing Nokia's 5.375% 2019 bonds.

Source: Grab Nokia's Bonds That Yield 6.8% Instead Of The Stock