Struggling mobile phone manufacturer Nokia Corporation (NOK) saw its shares soar Thursday on news that it expects fourth quarter operating margin to come in at a range of flat to +2%, better than the expected -6% drop. While this news gives investors some optimism for the short term, does it actually show signs that Nokia is moving forward with a positive turnaround strategy? Or should investors not be impressed by simply exceeding low expectations?
From Darling to Dud
Nokia has had a troubled 5 year run. Over this time frame the company has seen its stock fall by -87.67% into the single digits. Furthermore, since June of 2000 the stock is down -92.36% from its all time high. Meanwhile, other phone manufacturers like Apple (AAPL), Samsung, and other Android based-smartphone makers have left Nokia in the dust. The Finish company has not been able to innovate or compete with these current mobile and computer giants. In fact, to stay on the level of the above mentioned competitors Nokia has partnered with Microsoft to release Windows-based phones, which have not done much to compete with the “big two” platforms in the space (Apple’s iOS and Google’s Android). It seems as though Nokia management cannot make many right decision theses days.
The company used to have a 40% market share in the mobile phone sector; now market share is in the single digits. Over the past year the company has seen losses in the billions, cut jobs, and closed plants. This news is not welcoming for those believing that Nokia has the ability to make a comeback and share the stage with current tech darlings.
Were Q4 Earnings Really That Impressive?
So while fourth quarter expectations are said to exceed previous estimates, does this mean that Nokia is actually seeing positive growth? Executives are not setting a high bar to exceed expectations that are in the negatives. While these numbers might be realistic, it maybe shows that the company is just reaching for anything to show signs of life. Nokia has cited better-than-expected expenses and costs due to its restructuring program partially mentioned above; barley exceeding expectations due to cutting costs is not welcoming news for investors who would like to see Nokia grow.
A Classic Dividend Trap
Dividend-minded investors may be enamored with Nokia’s current attractive 6.93% dividend yield. However, this yield is a bit deceiving. It is easy for a company to show a high dividend yield when its share price falls below $5 (as price falls, yield goes up, assuming a constant dividend payout).
Investors must realize that maintaining this dividend might be difficult for Nokia moving forward. In recent years the company has posted negative earnings, signaling a possibility that even maintaining any dividend at all could be difficult. Some have even suggested that Nokia should get rid of its dividend altogether. This is also possibility if Nokia would like to re-shift some focus towards reinvesting to grow and innovate rather than pay out earnings to shareholders.
The Bottom Line
Investors should not get too caught up in Nokia’s fourth quarter earnings head fake. While an earnings beat might be somewhat positive, it should not shift an investors focus away from the fact that not much has changed for Nokia in regards of product or service innovation; the company seems to be grasping at straws to show signs of life going forward. There might not be any real growth strategy. Because of these factors, Dividend.com continues to rate Nokia as an “Avoid.”
Nokia Corporation (NOK) is not recommended at this time, holding a Dividend.com DARS™ Rating of 2.5 out of 5 stars.
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