for the first time since 1989 as the Finnish company struggles with its
transition to Windows Phone as its main smartphone platform.
Nokia has burnt through 2.34 billion euro (around $3.01 billion) in the last two quarters alone and analysts expect the company to continue bleeding cash in the following six quarters at minimum. But with no dividend to pay Nokia might face a negative reaction from yield-oriented investors.
Still, that’s a risk the phone maker has to take, and many analysts are surprised that Nokia hasn’t cut dividend payout until now. Currently, Nokia stock is rated “junk” by the three major credit rating agencies.
Nokia denied to comment on reports about the possibility of it slashing dividends, and usually the Finns announce such news around January in its quarterly results announcement.
The company’s smartphone shared has slipped to merely 6.6%, down from more than 50% before the launch of the iPhone and Android devices.
As Nokia Oyj (NOK1V) depletes its cash pile amid a prolonged turnaround effort, investors are bracing for something that hasn’t happened in decades: no dividends.
The unprofitable phonemaker is consuming about $300 million a month, and many investors and bondholders say the company risks running out of funds as it struggles to gain traction for its smartphones, which trail Apple Inc. (AAPL)’s iPhone and devices using Google Inc. (GOOG)’s Android.
“Most crucial for Nokia now is to turn around their sales and reach profitability as soon as possible,” said Mikael Anttila, who helps manage corporate bonds, including Nokia debt, at SEB AB in Stockholm. “Until then, it would be rational for them to not pay dividends, to help maintain what cash they have.”
Without a dividend, Chief Executive Officer Stephen Elop risks alienating yield-focused investors at a time when Nokia’s stock price is headed for its fifth consecutive annual decline.
The cash concerns underscore the depth of Nokia’s crisis. The company has paid a dividend every year since at least 1989, which is as far back as its electronic records go. Even the breakup of the Soviet Union, a major buyer of Nokia’s networking gear whose demise spelled financial tumult for the company more than 20 years ago, didn’t prevent it from returning cash to investors.
Paper Mill
Nokia, based in Espoo, Finland, will probably omit the payout for 2012 after slashing it by more than half over the past four years to 20 cents a share, according to data compiled by Bloomberg. To maintain the dividend at its current level, Nokia would have to pay about 750 million euros ($964 million) annually out of its dwindling bank account.Doug Dawson, a spokesman for Nokia, declined to comment on dividend plans. The phonemaker typically announces its annual payout when it reports fourth-quarter earnings in January.
Founded in 1865 as a pulp and paper mill on the Nokia River, the company expanded into mobile phones in the 1980s and became Europe’s most valuable corporation at the height of the technology boom. But Nokia was slow to adapt as touchscreen smartphones became the real drivers of the mobile handset market, and its stock has plunged about 90 percent since Apple introduced the iPhone in 2007.
The company has announced more than 20,000 job cuts, closed production and research facilities and sold patents and other assets in a bid to become profitable again.
Dwindling Cash
Nokia lost 2.34 billion euros in the first half and analysts estimate losses will continue at least six more quarters, the average projections compiled by Bloomberg show. Its net cash has shrunk by half in the past five years to 4.2 billion euros at the of June and will drop below 3 billion euros by year-end, Standard & Poor’s predicts. Gross cash at the end of June was 9.4 billion euros.Nokia also has debt of 5.2 billion euros and some repayments are looming. A 1.25 billion-euro bond matures in February 2014, and the company faces repayments in 2016, 2017 and 2019, according to data compiled by Bloomberg. A 1.5 billion-euro revolving credit facility could help Nokia shore up its cash reserves.
The cost of insuring Nokia bonds using credit-default swaps has almost tripled this year and reached a record of 1,240 basis points on July 18. It added 18 basis points, or 1.9 percent, to 950.58 basis points as of 4:48 p.m. Helsinki time, the biggest intraday jump in three weeks, according to data compiled by Bloomberg.
Credit-Default Swaps
Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.With Nokia’s debt at junk status with the three main rating companies, it should already have suspended dividends, said Sami Sarkamies, a Nordea Bank AB analyst in Helsinki.
“It was a mistake not to stop the dividend payment given the weakened outlook,” he said. “This may cost shareholders dearly if Nokia for example needs to pull the plug early on its smartphone revamp due to not being able to afford the costs.”
source: Bloomberg
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