Nokia Corp. (NYSE:NOK) produced good net income growth in its recent second-quarter results released on July 31. Moreover, Nokia stock is now clearly free cash flow positive. It is likely to restart the quarterly dividend next year.
One of the reasons why Nokia started generating free cash flow (FCF) is because management is now focused on this as a goal. In Q1 they started a company-wide program to increase FCF and the release of working capital. This included project asset optimization, review of contract terms and inventory optimization. But more importantly, senior executives had a significant part of their incentives tied to FCF improvement targets.
It has already brought in great results. In Q2 FCF rose to 265 million euros, or roughly $312 million. On an annualized rate that works out to at least $1.25 billion.
In the past, the majority of Nokia’s FCF was made during the fourth quarter. Now the company believes that FCF generation will not be “seasonal.”So I suspect that FCF could easily reach $1.5 billion this year.
That is important because it will allow the company to resume paying its quarterly dividend.
Nokia May Be Able to Restart Dividends
Nokia stopped paying its quarterly 5 Eurocents dividend in the third quarter of last year. The board had decided that it wanted to invest the cash in 5G technology. In addition, the board said it was going to wait until net cash reached at least 2 billion euros.
As of the end of Q2, net cash was at 1.6 billion euros. It is likely to reach 2 billion euros by the end of the year.
I wrote about this in my previous article in February. The CEO said he thought that it would take three quarters in 2020 before the dividend would be restored.
Essentially this required investments in its new 5G technology, plus increases in free cash flow. In this past quarterly earnings release the CEO, who is leaving Sept. 1, said capex spending will be lower this year at 550 million euros. This is down from previous guidance of 600 million euros. That will also increase FCF.
So here is the thing. A quarterly dividend of 5 euro cents would cost about 280 million to 300 million euros. That would be up to 1.2 billion euros annually, or $1.42 billion.
In other words, since FCF will be about $1.5 billion or so this year, it looks like the company could begin to afford its previous quarterly dividend. That assumes FCF continues to stay positive as it did this quarter.
What to Do With Nokia Stock
Each American Depository Receipt (ADR) for NOK stock represents one ordinary share of the Finnish company stock. Nokia’s ordinary shares trade on the Euronext exchange. So if Nokia reinstates the 20 euro cents annual dividend, it would be equal to about 23.6 U.S. cents.
That means the Nokia stock dividend yield would be 4.9%.
That is a very powerful and attractive dividend yield. Moreover, even if Nokia pays a lower dividend, the fact that dividends begin again will likely move Nokia stock higher.
In addition, Nokia’s net cash position at 2 billion euros will make the stock look attractive. This amount of money represents about 8.8% of Nokia’s 22.8 billion euro market capitalization.
So the combination of free cash flow growth, a restarted dividend and a net cash position of 9% of its market cap make Nokia stock very attractive.
I suspect that Nokia stock will trade higher as the company grows its FCF and moves its net cash balance higher.
For example, a theoretical 3.5% dividend yield with a 20 euro cent dividend implies a price target of $6.74 per share for the ADR listed on the NYSE. That represents a potential gain of about 40% from current prices. This would be an attractive potential return over the next year for patient investors.
Mark Hake runs the Total Yield Value Guide which you can review here. As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities.
