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It's Not Too Late to Turn Bullish on Nokia Stock

By Will Healy – Jun 24, 2020 at 9:54AM

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5G could pay dividends, figuratively and literally, for this troubled telecom giant.

Nokia (NOK -4.05%) stock has experienced a rough ride over the last year. The loss of a contract with China Mobile, a dividend cut, and a price falloff related to the coronavirus pandemic (that mimicked the broader market) have all weighed on the telecom equipment provider.

However, the stock price has begun a steady rise since lows hit in mid-March and is trading above levels set just before the pandemic began. As the market recovers, it could indicate that prospects are beginning to brighten for the Helsinki, Finland-based company. With the potential of 5G finally starting to bear fruit, investors may again want to look at Nokia stock.

Blue network drawn over a lit-up city at night

Image source: Getty Images.

Could Nokia finally stage a comeback?

Nokia has become a frustrating tech stock. In 2006, the stock sold for as much as $62.50 per share as it dominated the cellular phone market. Unfortunately, the introduction of Apple's iPhone devastated this business, forcing the company to redefine itself.

Today, Nokia has become a 5G telecom equipment provider. However, despite the potential of 5G, it still currently trades more than 93% below its all-time high. Moreover, Nokia stock is still down by 14% from year-ago prices.

NOK Chart

NOK data by YCharts

Nonetheless, the same political troubles that may have cost Nokia its China Mobile contract could open doors in other areas. As a result of political battles and the criticism China is getting over its trade policies and its connections to COVID-19, telecom providers around the world appear increasingly intent on building networks without using Huawei equipment. This opens the door to higher sales for Nokia in these markets.

These improved prospects may have affected earnings projections. Though analysts forecast a 4% decline in profits for this year, they expect earnings to increase by 25% in fiscal 2021. Over the next five years, they also believe profits will grow by an average of over 13.3% per year. This could make the company's forward price-to-earnings (P/E) ratio of 18.1 more palatable to investors.

The turnaround may have already begun. Current shares are now trading back above prices they were trading at just after the announcement of the dividend suspension in October 2019.

Nokia's dividend status

Admittedly, the dividend suspension played a significant role in Nokia's current stock price. When it happened, Nokia stock plunged by 24% in one day. This occurred not because of a financial day of reckoning, but rather to allow for increased investment in 5G and to reinforce cash reserves. Nonetheless, Nokia has yet to return to the $5.11 per share level, the price where the stock sold before the dividend cut.

When the dividend will return remains unclear. However, the depth of the stock price drop after the payout suspension showed the importance of dividends to Nokia shareholders. For this reason, current investors should see a bump higher when Nokia finally restores its payout.

Also, since the dividend cut, management has consistently indicated that it had a plan to reinstate payouts. In the most recent earnings report in April, Nokia stated a long-term goal of an "earnings-based growing dividend." Moreover, senior leaders at the company have a portion of their compensation tied to cash flow improvement targets. Hence, a return to dividends is likely a question of when and not if they return.

Both a return to dividend payments and an improving competitive situation bode well for the future of Nokia stock. As 5G becomes more critical to the economy, it could begin a virtuous cycle where improving cash flows lead to higher payouts and a rising stock price. 

Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

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