Nokia Oyj (ADR) (NYSE:NOK) has got its swagger back. Between 2014 and late last year, NOK stock traded relentlessly to the downside. By the time the stock reached bottom, it had lost half its value. However, 2017 has brought a reversal in fortunes. The recent earnings report accelerated the reversal, as NOK stock sprinted 20% higher in recent days and reached a new 52-week high on Tuesday.
Bulls have gotten excited since, as Chris Lau wrote recently, this quarter was enough to demonstrate that management’s turnaround plan is working. However, the quarter didn’t deliver on all counts. Revenues didn’t match expectations, and the company’s network division seemingly underperformed.
Still, it’s hard to deny the company’s momentum. Its operational strategy appears to be working. But will it be enough to carry NOK stock up even farther?
NOK Stock Cons
Core Network Business Slowing: Nokia has transformed itself into quite a diversified operation. That’s good news for NOK stock owners, since the company’s legacy operations are struggling. The network business saw sales slide 6%. Telecom operators are in a soft part of their cycle; largely done rolling out current technology, but not yet ready for the leap to 5G.
Tim Long, of BMO Capital, recently warned about telecom spending for the year. He specifically highlighted concerns out of China, where three of the major carriers appear to be cutting spending. Long noted that China Unicom (Hong Kong) Limited (ADR) (NYSE:CHU), for example, spent 72 billion Chinese yuan on capex last year, but is planning only 45 billion this year. That’s a massive drop-off. And companies like Nokia take the brunt of the blow; Long estimates that Nokia generates 10% of its revenues from China.
Weak Profitability: While NOK stock has turned the corner, it may be too early to say the same about the business. The company has lost money four out of the past six fiscal years. Nokia returned to profitability in 2014 and 2015, but that quickly gave way to more red ink. The company has now shown negative earnings five of the past six quarters.
Nokia just eliminated more jobs in Finland last week, with the company’s regional manager stating that: “In order to succeed in this market environment we must continue to streamline our cost structure and increasing efficiency.” That’s not the sort of language you expect to hear from companies who are on a roll. Yes, NOK stock is going up, but the income statement doesn’t yet reflect improving investor enthusiasm.
Erratic Dividend: As might be expected, NOK stock is not a star dividend performer. However, last year, Nokia paid a much larger dividend of 29 cents per share to reflect previous profitability. Given that NOK stock averaged around $5 per share last year, that worked out to an almost 6% year. NOK stock attracted some dividend yield hunters who thought they had found an unheralded income source.
However, one month from now, many of these yield players are likely to wind up disappointed. Nokia has cut the dividend for this year from 29 cents to 18 cents. That amounts to a much more pedestrian 2.9% dividend yield at today’s stock price. Don’t be surprised to see some short-term weakness in NOK stock following the annual dividend, which is expected to be paid June 9, as investors adjust their yield calculations downward.