Investors in Nokia should not trust the dividend after the company announced its earnings last week. Nokia (NOK) cut its full year outlook and completely abandoned its 2011 profit expectations. The company’s shares have tumbled 21% as the company has seen its market share evaporate since the introduction of the iPhone. Sales revenue is going to be well below the $8.75 billion in sales originally expected for the year.
Nokia’s Earnings Drop
Nokia’s stock is down to $6.69 per share and is under a lot of pressure. The company is currently paying a dividend of 46 cents per share. That is a 5.7% yield. The company is relying on its multi billion dollar cash hoard to keep the dividend safe for the short term but the company’s earnings make the dividend look shaky over the long term. Lower sales and rising operating losses could quickly cripple the company’s financial position. I expect Nokia to reduce its dividend once again and to start laying off some of its nearly 60,000 employee labor force.
Investors in Nokia have to e concerned that the company cannot provide any guidance for the current year and does not know what the future will look like for the company. The company even admitted that they have mismanaged inventory in foreign countries like China and is losing market share. Cellphone shipments appeared higher over the past few quarter because the company built up inventory at many of its distribution facilities. Nokia failed however to sell many of these phones and was left with a glut of unsold inventory.
The stock has been massively downgraded by every analyst and EPS estimates have fallen from 60 to 70 cents per share for the year to 17 to 20 cents per share. Some analysts are even forecasting a loss for next year. This was a shock to many people including me. I never thought that Nokia was facing such dire circumstances. It was clear that the company was losing market share but the loss of market share is rapidly accelerating.
At $6.69 a share, Nokia is a speculative buy at best. Shares have not been this low since the 90’s. Speculative investors can buy the shares on the hope of a takeover by Microsoft or a stabilization in market share. Nokia’s hopes rest on its Windows based phones that are set to roll out soon. The stock has become too risky to be a core holding of a prudent investor’s portfolio and should only be purchased by risk takers.
Do you think that investors buying Nokia are getting a good value or catching a falling knife?