Nokia (NYSE:NOK) just reported solid results for its fourth quarter on Feb. 6. The Finnish telecom equipment and software maker produced 1.357 billion EUR in free cash flow. This drove its net cash balance up to 1.73 billion on Dec. 31, 2019. NOK stock is up over 6% since earnings.
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It is now much more likely that Nokia will be able to restore its regular dividend payments. As I pointed out in my article on Dec. 30, “free cash flow is the key to the future of Nokia.”
Free Cash Flow Growth Will Lead to Dividend Payments
Last quarter, management warned that unless it cut out the dividend it would not be able to raise its cash balance. It said then that once the cash balance hit 2 billion EUR, it would restore the dividend.
With this latest earnings release, management was even more clear, now that free cash flow is growing again. Here is what they said:
“As we noted in our third quarter announcement, our Board said it expects to resume dividend distributions after Nokia’s net cash position increases to approximately EUR 2 billion.
Given typical cash seasonality, we would not expect to reach that level in the first three quarters of this year.
Should we exceed the EUR 2 billion level after that point, the Board will assess the possibility of proposing a dividend distribution for financial year 2020. “
So management is now predicting that by the end of 2020, if free cash flow continues to raise the cash balance above 2 billion EUR, it would “assess” paying a dividend. Since net cash is already at 1.4 billion EUR, it seems highly likely that the 2 billion EUR level will be reached this year.
For example, despite the huge increase in free cash flow during Q4, its full-year 2019 FCF was negative 257 million EUR. So if the company can continue to make strides like in Q4, it should reach its net cash goal sooner than later.
Nokia’s 5G Win Rate Is Increasing
Nokia reported that it won 18 more 5G deals in Q 2019. For example, at the end of Q3 it had signed 48 networks to use their 5G systems, with 15 that were already live. As of Q4, that figure had risen to 66 deals, with 19 live networks.
As I wrote in my last article, Nokia is battling hard against Swedish 5G maker Ericsson (NASDAQ:ERIC) and Huawei from China. Price cutting, incentives along with technology/software competition has been fierce.
Nokia now says, “At the end of the fourth quarter 2019, our 5G win rate was over 100% outside of China and in the mid 90% range including China, reflecting strong performance.”
Moreover, its super-efficient 5G Powered By ReefShark, a system-on-a-chip 5G design, was 10% of its 5G shipments in Q4. It expects to have that ratio reach 35% by the end of 2020 and 70% by 2021 year-end. This chip will deliver margin improvements for Nokia as well as performance advantages.
Nevertheless, according to the Wall Street Journal, Nokia is going to be hit hard by the coronavirus impact on its supply chain in China. Nokia did not quantify that yet in its conference call. Nokia has thousands of research-and-development employees in China.
Nokia Is Still Cheap
Right now NOK stock trades for just 16.4 times its 2020 earnings expectations by Seeking Alpha analysts. Nokia has a nearly $25 billion USD market value, so its FCF yield is high.
For example, last year’s FCF of 1.357 billion EUR equates to an FCF yield of 5.90%. (This is calculated as follows: $1.0878 FX rate times $1.357 billion, all divided by $25 billion = 0 .059.) That is an attractive valuation, especially if free cash flow continues to grow this year, as Nokia expects it will.
Moreover, possibly with some tongue in cheek, the U.S. attorney, William Barr, suggested this week that the U.S. government should consider taking a controlling stake in Nokia. The U.S. is intent on preventing China’s Huawei group from gaining inroads in the 5G telecom market.
That helped push up NOK stock. It probably didn’t hurt that Barr himself was the former general counsel for Verizon Communications (NYSE:VZ). So far no one is quite sure if he was serious. It is not uncommon for governments to take controlling stakes in telecom operators, but focusing on telecom gear makers is less common.
What Should Investors Do With NOK Stock?
So far it seems pretty clear that Nokia’s board is not going to make a decision about paying a dividend until the end of 2020. But if Nokia produces solid earnings, free cash flow, and net cash balance rise, watch out.
NOK stock will likely rise in anticipation of the resumption in dividend payments if that occurs. So at some point, investors will have to decide if Nokia is cheap enough as it stands if they want to benefit.
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 receive a two-week free trial.
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