3 Reasons Nokia Investors Should Be Nervous

When a company rids itself of a money losing business, investors sometimes get wrapped up in the idea of how the company may do in the future rather than looking at actual results. Clearly Nokia Corporation's decision to sell its handset business to Microsoft made sense. Nokia can now focus on its Network, HERE, and Technologies divisions and Microsoft is folding the handset business into its burgeoning devices business. The bad news is, the new Nokia isn't growing and without significant changes, investors should be nervous.

Is this just an excuse?
Just because Nokia doesn't have to distract itself with the handset division isn't a sure sign of better results in the future. The company's single most important division is Networks which represents about 87% of the company's revenue.

This is a significant difference between Nokia and a few of its competitors like Alcatel-Lucent or Juniper Networks . Alcatel gets just less than 46% of revenue from Networking where it produced year-over-year revenue growth of nearly 7%. Juniper did even better with more than 88% of the company's divisions reporting year-over-year revenue growth of at least 6%.

The first reason Nokia's investors should be nervous, is the company's heavy reliance on its Networks business. If this unit doesn't return to growth, not much else will matter. Given that this division reported a 17% annual decline in sales and last quarter this decline came in at 22%, Nokia's Networks division is clearly losing business to its peers.

Even more disconcerting for investors is the fact that in successive quarters, Nokia's management said that this sales decline occurred because of the exit of certain projects. The company also noted that there was a cyclical slowdown in LTE roll-outs. Ironically, Alcatel-Lucent specifically said that, "LTE continued to be strong, notably in the U.S."

Nokia investors can have their cake and eat it too. The company is losing sales while its peers are reporting growth in the same areas. If the company is strategically exiting certain businesses, investors have to wonder what will be left once the division is done adjusting its focus for the future.

Regular or special dividends won't matter if they aren't sustainable
The second reason Nokia investors should worry, is the company is proposing both regular and special dividends as a show of good faith from the Handset division's sale. While normally dividends are a positive from any company, paying dividends with questionable staying power seems like desperation.

Compared to its peers, Nokia's proposed regular dividend would have used about 70% of the company's core free cash flow (net income + depreciation - CapEx) in the last quarter. Juniper on the other hand, has a newly minted dividend that would use less than 23% of the company's free cash flow, and Alcatel-Lucent isn't in a position to pay dividends at this time. The point is, Nokia is offering investors a dividend with its primary division awash in a negative sales trend.

Another issue is, Nokia's special dividend and proposed share repurchases will use about $3 billion of the company's cash. For a company with limited free cash flow, this is a significant expense. In addition, Nokia's diluted share count has risen by almost 7% in the last year, so even a significant share repurchase may only allow investors to get back to even.

This is a long-term challenge
The third issue Nokia shareholders should be nervous about is, how long it will take for the company to regain the cash it is about to spend. Based on last quarter's free cash flow, Nokia would have only generated about $60 million in cash beyond capital expenditures and regular dividends.

Just Nokia's special dividend and proposed share repurchases of $3 billion, would take over 5 years to recover even one-third of what the company is about to spend. The point is, it's difficult to see how Nokia's regular dividend would be well covered with nearly 90% of the company's business in decline.

The bottom line is, Nokia is free of its handset division, but the company's troubles are hardly over. Short-term investors may benefit from dividends and share repurchases, but long-term investors have multiple reasons to be nervous about the company's future.

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The article 3 Reasons Nokia Investors Should Be Nervous originally appeared on Fool.com.

Chad Henage has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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