The handset maker, Nokia Corporation (NYSE:NOK), working hard to win lost turf, may end up doing something which it has not done in decades i.e. no dividends to the investors.
The struggling phonemaker is spending about $300 million a month to gain traction for its smartphones, which trail Apple Inc. (NASDAQ:AAPL)’s iPhone and other devices using Google Inc (NASDAQ:GOOG)’s Android OS. If the company continues to consume cash at such a speed, many investors and bondholders assume that it might run out of funds.
“Most crucial for Nokia now is to turn around their sales and reach profitability as soon as possible,” said Mikael Anttila, who helps manage corporate bonds, including Nokia debt, at SEB AB in Stockholm. “Until then, it would be rational for them to not pay dividends, to help maintain what cash they have.”The Finnish company certainly can’t afford to risk alienating yield-focused investors at a time when Nokia’s stock price is headed for its fifth consecutive annual decline.
Nokia Corporation (NYSE:NOK) has never missed on dividends, at least, not since 1989 which is as far back as its electronic records go. Even at the time of financial crisis more than 20 years ago, due to the breakup of the Soviet Union, a major buyer of Nokia’s networking gear, the company did not disappoint its investors. As per the data compiled by Bloomberg, Nokia has already slashed its dividends by more than half over the past four years to 20 cents a share, and to maintain the same level of dividend, the company will have to shell out about 750 million euros ($964 million) annually from its dwindling bank account.
Nokia Corporation (NYSE:NOK), based in Espoo, was founded in 1865 as a pulp and paper mill on the Nokia River, and in the 1980’s moved to mobile phones, becoming Europe’s most valuable corporation at the height of the technology boom. But the company lost most of its market share to its rival, Apple, as it was slow in responding to the increasing popularity of touch-screen smartphones. Nokia’s stock has plunged about 90 percent since Apple introduced the iPhone in 2007. The handset maker dominated more than half of global phone market before the first iPhone and Android devices were introduced, but now it only has a 6.6 percent share, while the iPhone and Android enjoys about 85 percent of the market share, according to research firm IDC.
Nokia Corporation (NYSE:NOK) posted a loss of 2.34 billion euros in the first half, and analysts estimate losses will continue at least six more quarters. The company’s net cash has been reduced by half in the past five years, to 4.2 billion euros, and is expected to drop below 3 billion euros by the end of this year. Apart from dwindling cash, the company also has a 5.2 billion euro debt. A 1.25 billion-euro bond matures in February 2014, and the company faces repayments in 2016, 2017, and 2019, according to data compiled by Bloomberg.
According to an analyst from Nordea Bank AB, Nokia should have already suspended the dividends, given the junk status of its debt “It was a mistake not to stop the dividend payment given the weakened outlook,” he said. “This may cost shareholders dearly if Nokia Corporation (NYSE:NOK), for example, needs to pull the plug early on its smartphone revamp, due to not being able to afford the costs.”