Nokia Says "No" to Dividend


The much-anticipated results are in, and Nokia did just about as expected in its most recent Q4 announcement. Unfortunately for shareholders enjoying Nokia's stellar dividend yield -- currently around 5.5% -- Nokia's board of directors intends to end the payout beginning with Q4 2012, at least for the foreseeable future.

Nokia's decision to suspend its dividend shouldn't be a complete shock for shareholders; the rumor mill has been active leading up to today's earnings. So, why the change of heart? As Nokia CEO Stephen Elop put it, ending the dividend now "further solidifies the company's strong liquidity position."

A few specs
The decision to cut its dividend certainly casts further doubts on Nokia's investment prospects. Contrary to what some may have expected from Nokia's Q4, or infer from the cutting of its dividend, Nokia's impressive cash pile grew last quarter. Compared with Q3, Nokia's net cash position jumped 800 million euros, to 4.4 billion euros, and that takes into account 1.5 billion euros in costs associated with Nokia's comprehensive cost-cutting initiatives.

Nokia shareholders don't need to be reminded that 2012 started off pretty rough. As Elop's mentioned on more than one occasion, the strategic shift to Microsoft's Windows 8 OS to run its Lumia phones will take time. Elop wasn't shy discussing Nokia's tough start to last year, saying, "While the first half of 2012 was difficult for Nokia Group, in Q4 2012 we strengthened our financial position, improved our underlying operating margin in Devices & Services, introduced the HERE brand to expand our mapping and location experiences, and drove record profitability in Nokia Siemens Networks."

As expected, Nokia Siemens Network, or NSN, drove much of Nokia's bottom-line results, continuing to crank out margins and operating income while the Windows 8 phone lineup gains traction. To give you an indication of how valuable NSN is to Nokia, of the 800 million euro increase in net cash on its balance sheet, 650 million euros came from NSN. The unit's non-IFRS 14.4% operating margin is the highest since NSN's formation in 2007 and couldn't have come at a better time.

What about those phones?
When you talk about Nokia nowadays, you have to talk about phones. Sure, NSN is driving its renewed profitability right now, but we all know its Nokia's Lumia and Asha smartphone sales that will make or break 2013, and beyond. Elop shared Nokia's phone sales results a couple of weeks ago, when he announced that 4.4 million Lumia units were sold in Q4, along with 9.3 million middling to low-end Asha smartphones, and a couple of million phones running its Symbian OS. In total, Nokia sold 86.3 million mobile devices last quarter, led by sales in the Asia-Pacific, Middle East and Africa, and European regions.

Not surprisingly, Nokia's total mobile device sales were affected by the winding down of its Symbian OS phones as it transitions to Windows 8. Toward that end, Windows 8 appears to be picking up steam outside the U.S., providing support to Nokia's overseas sales efforts. For Nokia, the two usual roadblocks to growth, Apple and Google , continue their (respective) domination.

Google's Android OS still rules the smartphone world, and Apple's iPhones dominate the domestic smartphone market -- accounting for 51% of U.S. sales in Q4, as per a Kantar report. But there are markets outside the U.S., and Microsoft is making inroads internationally. In Britain, Windows 8 accounts for 5.9% of the market, and 13.9% in Italy, three to five times better than last year. And with Nokia's strong global position across multiple price points, the U.S. isn't the only place to grow smartphone sales.

Outlook for 2013
Elop's guidance for 2013 didn't exactly inspire confidence. The new year is expected to start with a relative thud for Nokia, as seasonality, an ultra-competitive marketplace, and continued efforts to shed expenses will all take their toll. Knocking Apple and its 51% domestic market share down a peg, or two, or Google and its global OS dominance, isn't going to happen overnight. We all knew that.

As today's early trading indicated, Nokia's decision to vote on ending its dividend isn't going to be taken lightly, nor should it. But let's put this in perspective: Apple, before it succumbed to reality and paid shareholders a dividend, and Google even today, each have more cash on their respective balance sheets than most countries. Yet Google pays no dividend in spite of its $48 billion in cash, while Apple has nearly $40 billion on its most recent balance sheet, and pays shareholders a so-so 2.3% yield.

Proponents of having Apple and Google pay little to no dividends argue that doing so frees up cash to invest in the business -- and they're right. As Nokia continues becoming leaner and meaner with its cost-cutting efforts, and Lumia sales grow as Windows 8 gains acceptance worldwide, the 750 million euros in dividends paid to shareholders last year is best used to drive Nokia's momentum in 2013.

Nokia's banked its future on Windows smartphones, and the most recent Q4 sales didn't disappoint. But Nokia has hardly completed its turnaround; there's still a lot of work to be done. Motley Fool analyst Charly Travers has created a new premium report that digs into both the opportunities and risks facing Nokia to help investors decide if the company is a buy or sell. To get started, simply click here now.

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