Seeking Alpha
Investment advisor, growth at reasonable price
Profile| Send Message|
( followers)  

Nokia (NYSE:NOK), until fairly recently, has been hailed as the world's leading handset maker. In 2007, Apple released its first iPhone that ushered in a smart phone revolution leaving Nokia behind. Without a blockbuster product release, consumers are likely to still view the Nokia brand as a 90's relic. Today, Nokia stock trades for $2.65, while the underlying business bleeds cash. Despite prospective bankruptcy, Nokia offers a 10% dividend yield (adjusted for euro to dollar currency conversion).

Nokia's payout appears especially robust, at a time when the Standard and Poor's 500 Index yields a shade less than two percent and fixed income rates are effectively zero. Conservative investors mining financial markets for yield should avoid Nokia stock. Stephen Elop, CEO, is likely to get the memo and eliminate Nokia's dividend altogether, in hopes of salvaging this business.

History of Nokia Dividends

Nokia, a Finnish company, pays out dividends annually, rather than upon a quarterly basis. Nokia typically declares its dividend payment in January, before going ex-dividend in early May. Dividends are paid by that last week in May to shareholders who were on record earlier that month. Nokia's elongated dividend schedule further complicates stock analysis. One year is literally one eon within the technology space.

In 2008, Nokia offered a 78-cent per share dividend, which amounted to a 2.8% yield at the time. After a series of successive cuts, Nokia paid out 55-cent and 26-cent per share dividends in 2011 and 2012, respectively. On May 4, 2012, Nokia went ex-dividend for its 26-cent dividend at $3.15 per share, which also calculates out to an impressive 8.2% yield payable later that month. After this 2012 announcement to slash its dividend by 40% from 55 to 26 cents per share, Nokia management offers deafening silence regarding next year's payment. A rigid smart phone oligarchy working against Nokia's deteriorating finances indicate that dividend suspension is inevitable for 2013. Nokia would then fail to pay dividends for the first time in seventeen years.

Nokia Beneath Smart Phone Oligarchy

Nokia, Microsoft (NASDAQ:MSFT), and Research In Motion (RIMM) all labor beneath the smart phone complex dominated by Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and Samsung. A comScore report for August 2012 U.S. mobile telecommunications market estimates that Google Android and Apple iOS operating systems serve 53% and 34% of all smart phone subscribers, respectively. On the handset side of the ledger, Samsung and Apple are first and third in this market, respectively. At the bottom of the heap, Research In Motion Blackberry, Microsoft Windows, and Nokia Symbian operating systems are left to haggle over the dwindling 13% share of the smart phone market. Indeed, Google and Apple continue to consolidate power, as shown by a collective 4% increase in share above the prior quarter.

The smart phone, as the focal point of a consumer electronics ecosystem, is becoming quickly commoditized. On August 24, a U.S. Federal District Court Judge Lucy Koh ordered Samsung to pay $1.05 billion in damages to Apple on patent infringement charges. This verdict effectively bans Samsung Android handsets from the U.S. market. The following week, a Japanese court ruled Samsung innocent of these very same patent infringement charges. Now, Samsung is retaliating by including the iPhone 5 in a countersuit of its own on U.S. soil. These contradictory rulings showcase the similarities in leading smart phones as conduits for telecommunications, web browsing, photography, and musical entertainment. At this point in the product cycle, sales are largely predicated upon what consumers deem to be "cool." In Wall Street terminology, goodwill shared between Apple, Samsung, and Google is worth at least $10 billion.

In February 2011, Nokia hitched its wagon to the Microsoft brand. According to Sascha Segan and PC Magazine, this $1 billion deal is a "humiliating climbdown" for Nokia, which is now effectively relegated to the Trojan Horse role of original equipment maker (OEM) for Microsoft Windows. For Microsoft, even a tepid October 26 Windows 8 release will generate mountains of cash through software licensing. Nokia, however, remains well on the road to failure, if Windows 8 is anything less than a blockbuster event. According to technology critic Dan Costa, Microsoft is taking a "huge gamble" that the marketplace will embrace its fusion of traditional tablet, personal computer, and smart phone interfaces, beneath one Windows 8 umbrella.

The Microsoft Windows 8 partnership, in conjunction with regular dividend payments, represents risks that Nokia shareholders cannot afford to take. Prior to the Holiday Season, the Nokia Lumia 920 is set for launch. According to Nokia, the Lumia 920 is a fun phone "designed to wow" in five separate colors. The Lumia 920 is notable for the beauty and functionality of Nokia Maps, alongside the picture taking clarity of its 8.7-megapixel camera. Qualcomm's 1.5 GHz S4 Snapdragon processor powers both the Samsung ATIV S and Nokia Lumia 920 Windows 8 phones. Reports out of Europe place an unlocked Nokia Lumia 920 phone between the $700 and $850 price point. At these levels, Nokia's latest phone would directly compete against the market leading iPhone 5 and Samsung Galaxy SIII.

Nokia will quickly discover that it is out of its League.

The Bottom Line

At Nokia, time is of the essence. For its latest second quarterly period ended July 19, 2012, Nokia posts a staggering $1 billion in operating losses, which flows down to roughly $2 billion in total losses. Nokia's poor financial results are directly attributable to its inability to compete against Apple, Google, and Samsung within the telecommunications market. In terms of year-over-year results, Nokia is suffering more than a 30% decline in smart phone sales according to both dollar amount and units sold. In order to remain viable, Nokia must either stem the tide with an immediate blockbuster product release, or "float the note" through financial engineering that strengthens its balance sheet.

In terms of sales, the new Lumia 920 sets Nokia up for a repeat performance of the already outdated Lumia 900. Stephen Elop describes Lumia 900 sales as "mixed," after one April of Nicki Minaj concert promotions, AT&T and Microsoft marketing dollars, and $100 Nokia rebates that effectively gave these phones away. With the smoke clearing, Nokia now operates with a $41 billion balance sheet that includes $10 billion in goodwill, intangible assets, and property plant and equipment. In terms of liquidity, Nokia carries $13.6 billion in cash and securities over top of $7.2 billion in financial liabilities.

With $2 billion in losses, Nokia is not demonstrating the ability to leverage fixed assets and intellectual capital for a profit. Theoretically, Nokia's $10 billion in goodwill, intangible assets, and property plant and equipment should be significantly written down. Google's recent $12.5 billion Motorola acquisition may serve as evidence that Nokia patents are of minimal value on the open market. If Nokia continues to bleed cash, however, executives must proactively consider systematic sales of separate service, handset, and software divisions of the company, before being forced to do so at bankruptcy fire sale prices.

To buy time, Nokia must eliminate its dividend, altogether. This move alone would save Nokia roughly $1 billion over the next year and effectively purchase another eighteen months of viability. For Q2 2012, Nokia records $133 million in cash from operating activities, over top of $407 million from investments, and $704 million spent on dividends and paying down debt. The result of these transactions tallies up to a relatively minor $67 million decline in Nokia's nominal cash position for the quarter. When adjusted for interest-bearing liabilities, however, Nokia reports a 14%, or $880 million loss in net liquidity relative to the prior quarter.

Conservative investors should take heed and sell stock. Nokia will eliminate dividend payments prior to bankruptcy.

Source: Memo To Elop: Eliminate Nokia Dividend, Stave Off Bankruptcy