Since my last article on Nokia (NYSE:NOK) stock on Nov. 13, nothing much has happened. I wrote in that article that Nokia stock would not move much until dividend payments were restored.
The key to the restoration of those dividends is expected growth in free cash flow (FCF). For Nokia, its Q3 FCF was just 269 million euros. This was not sufficient to cover the Q3 dividends paid of 321 EUR million.
So Nokia decided to “pause” dividend payments in order to increase its investments in 5G technology. Needless to say, investors in NOK stock weren’t pleased. The Nokia stock price fell 30% to the mid $3 range, where it remains today.
Moreover, Nokia investors likely felt more than misled. Nokia had just started a new policy of paying a quarterly dividend. Shareholders at the Annual General Meeting on May 21, 2019, approved the policy. But then after only two quarterly dividend installments, the board called off further payments until its FCF improves.
Outlook for FCF at Nokia
Despite Nokia’s profit warning, some analysts are becoming more positive on Nokia’s outlook because of its large base of 4G customers. A good number of them will likely have to upgrade to 5G. Nokia has over 400 4G customers.
One analyst predicts that FCF will rise to $1 billion in 2021 and $1.48 billion in 2022. Of course, that implies that dividends might not be paid for at least 2 years. that is not going to be good news for Nokia stock for a good while.
The basic problem, according to the Wall Street Journal, is that the early versions of the new 5G equipment are proving costlier than expected to develop and manufacture.
Fierce 5G Competition and Other Factors
In addition, Huawei and Ericsson (NASDAQ:ERIC), Nokia’s competitors, compete fiercely on prices. They have cut their prices on equipment and services in order to build market share. They want to capture Nokia’s large 4G customer base.
Just as Nokia was intending for them to stay some of these clients are leaving. For example, Telefonica’s German unit just ordered its 5G equipment from both Huawei and Nokia.
The good news, as such, is that Huawei can’t sell in the U.S. So Ericsson and Nokia are competing fiercely for U.S. public and private clients.
According to Barron’s, Huawei has already picked up 50 5G clients. Huawei intends to win the 5G race. It uses access to radio spectrum as a competitive factor.
European and Asian carriers have an infrastructural advantage compared to U.S. carriers. This tends to favor Huawei, as a supplier in those countries. The Wall Street Journal recently produced a video on YouTube that explains these differences in radio spectrum access.
What Should Investors in Nokia Stock Do?
So far it is too early in the 5G battle to see who the clear winners are going to be. One thing is for sure, Nokia needs to spend more and lower its prices to grab market share.
That means Nokia may not restore the dividend for a good while. As one analyst put it, Nokia stock “may need to attract a new crop of value-driven investors who don’t put much weight into dividends.”
Good luck with that.
The bottom line is it will take time before Nokia stock hits a new high.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.
