The first company I will review is technology giant Nokia. A lot has been said about Nokia, from praised to almost hated by some. Many made money and a lot lost when IT-bubble burst back in 2000. If you owned Nokia options and sold them at the right time you did make a lot of money in a short period.
The setup is Nokias history followed by biggest mergers & acquisitions, after that we will touch the financials for last 18 years and look at if you should have been an owner versus Nokia manager or board member. Before summarizing the post, I will display how I made a little of money of Nokia stock, a few old trades.
Nokias History, From a Paper Mill to Tech Giant
Nokia has a long history, and it might surprise you that Nokia started as a paper mill in 1865. In 1898 Finnish Rubber Works was established followed by introduction of electricity in Finland, a company named Finnish Cable Work was established in 1912. These three companies were merged into one in 1966, the new company name was Nokia. During this time Nokia was in several industries, integrated cable, electronics, tires and rubber footwear.
In 1979 Nokia and Salora founded a joint venture called Mobira (derived from mobile and radiophone) which focused on developing what was then called radio phones.
Since 1990 Nokia recognized the potential in mobile phones and started heavily investing and developing phones. Nokia got some publicity when Mihail Gorbachev called his communication minister from a Mobiara phone in 1989. After this the phones started to develop in a very fast paste, 2004 Nokia launched its first touchscreen phone, the Nokia 7710.
In Q4 2004 Nokia had a 34% market share of shipped phones, equivalent to about 66 million, only to sell about 3,8 million in Q3 2019. Today Nokia has a licensing agreement with HMD Global to manufacture Nokia phones, number of phones are not on the same level as during the hay days.
What also needs to be highlighted is the number of companies that today are listed or part of another company and once were a part of Nokia. Examples like Airam, Nokian Tyres, Essity (soft tissue division), PKC Group, Kemira Chemicals (part of Kemira group) and Grid Solutions (part of General Electric Grid Solutions). Nokia has been listed at Helsinki Stock Exchange since 1912 and in New York since 1994. If you would have received the shares in these companies you most likely would not have to work today (for the fire people).
Biggest Acquisitions & Divestments
Nokia has made a lot of acquisitions and divestments over the years, therefore we shall focus on the main acquisitions and divestments. You can have a closer look at smaller acquisitions and divestments on Nokias website.
The company has many big leaps over the years, from a papermill to dominant phone maker ending up as a network company today. Looking a bit closer at acquisitions and sold divisions we see a lot of interesting moves. One of the biggest acquisitions was Alcatel-Lucent back in 2015 for 15,66 billion EUR (announced April 15, 2015), which apparently has not delivered the promised synergies.
2014 The big move
On April 25th 2014 Nokia sold its Devices and Services (mobile phones) unit to Microsoft in for 5,44 billion EUR, a really
good price considering what market share Nokia phones had at that time. Eventually Microsoft did not see any use of the mobile devices purchased from Nokia.
2015 Maps out, France in
HERE was sold at the end of 2015 for 2,55 billion euros to Audi, BMW and Daimler (maker of Mercedes cars), HERE was Nokias mapping, navigation and location program
15 April 2015 Nokia announced its acquisition of Alcatel-Lucent at a cost of 15,6 billion euros, the acquisition was made as an all-share acquisition while Nokias share was at 7,77€. As stated on the press release, they targeted a reduced interest expenses by 200 million a year and 900 million euros in operating synergies, sales would land at 25,9 billion euros. Maybe some of the targets were met however they need to pick up on sales and profitability.
Nokia Financials and Dividends, From Good to Disastrous to what is wrong with this company bathing in cash?
In this section we look at Nokias financials and compare who the winner in the company is, is it the Board of Directors, Management Team or Shareholders who have gained the most. A big NOTE, only IFRS numbers have been gathered and each years numbers are according to that years annual report published on Nokias investors page. Do not look at the non-IFRS numbers as by now people should have learned, that is why Risto Siilasmaa was fired, apologies he was escorted out or requested to leave...
On October 24th 2019 Nokias Board of Directors decided not to continue distributing any dividends, discontinued the dividend, reasons were
- Guarantee increase of 5G investments
- Guarantee Nokias cash position
- Continue investing in growth in strategic areas such as enterprise and software
This decision frees up time and pressure from both Board Members and Management Team, if there is no pressure to deliver then time for laziness will proceed.
On December 3rd 2019 Chairman of the Board Risto Silasmaa "resigned " after it was clear the board was looking at wrong numbers. It also weakened ex-CEO Rajev Suris position. Questioning internal reporting and reliability of numbers. What needs to be stated is the use of non-IFRS numbers in Nokias reporting. Sari Baldauf will continue as the new Chairman of Nokia from start of annual general meeting in 2020.
My question is therefore, how much value if any has the management group and the board of directors created for shareholders versus how much have they earned during the same period?
This is a simplified question and example, yet one I have not heard anyone ask as it is sensitive. Question is also raised as my opinion is not to reward bad performance with perks, salary and fat bonus, that’s what I call skewed rewarding.
When reading Nokia's annual reports it is a bit confusing what has actually been the total compensation to Management Team in shares and in base salary and other compensations. They have partially separated the President and CEOs salary and partially bulked together share compensation with the rest of the Management Team. The main issue I find in Nokias reporting set up is the unclarity in management compensation, fortunately Board of Directors compensations are the only clear and detailed information you get (except for 2016 and 2015). Guess shareholder are seen as second-class people based on Nokias reporting standards.
Below are some of Nokias numbers summarized. Equity per share (excl. non-controlling interest), ROE (return on equity) and cash & cash equivalents per share. Equity per share has dropped due to poor performance while cash per share has increased coming from sales of business, mainly mobile devices. ROE swings a lot due to the volatile performance. What we can see is the impact from iPhone hitting Nokias profitability starting in 2007. Since iPhone was launched, we can roughly state that Nokia has not been profitable except when selling businesses. I would assume Samsung with their Galaxy models also destroyed Nokias phones. If I was a Nokia shareholder I would be worried that the company has not been profitable since 2007. This means the company has issues it needs to fix as soon as possible. Would also demand the Alcatel-Lucent synergies to be better highlighted and if there are none (which it looks like), then admit it has been a failure from some perspective.
Below we see R&D expenses (impacting income statement), retained earnings and cash & cash equivalents. An argument why Nokia should not pay a dividend could be the negative retained earnings. This argument is valid, however with over 6 billion euros in cash you can distribute some of it to shareholders without risking the whole company. Earlir stated the increased 5G investments are a little confusing, they had sold 5G already so why do they need to invest more in a product they already have made and does it really cost that much?
Owners Return
One note, the result may and will vary depending on which period is chosen. I chose the period end December 2004 to October 2020
as I wanted to display the long run return to shareholders and reduce
the impact from overvalued periods such as the IT-bubble. I personally
bought shares back in 2013 and 2019 only to sell them within the same year. Have to say it was profitable
and a short-term investors wet dream.
In order to give some examples on what return you as a shareholder have received, I have chosen two different dates, just for fun. The first date is 3 September 2013, as BBC had an article "Nokia: The rise and fall of a mobile giant", the stock opened at 4,36€ and closed at 3,97€. I will pick a stock price in between, 4,16€ shall do for this example. For the second date we will go further back, all the way to 2004, December 15th 2004 Financial Times article named "Nokia Bounces Back In Mobile Phone Sales", on this date the stock was at a high of 11,90€ and low of 11,71€, closing at 11,71€. Would say that based on the article by Financial Times some might have bought for say 11,89€ a share. We will go with the 11,89€ price per share.
As the graph shows just holding Nokia stock since 2004 would have been a bad investment and result in a loss up to 70 % of your investment while investing in 2013 resulted in -13%. Taking into account received dividends the result has been a bit different, the 2004 investment would still be at around -66% while 2013 would show a gain of 16% (before tax and not reinvested). Dividends since 2004 would total 4,29€ gross and 1,23€ if you invested in 2013. Note 2003 result dividends were paid in 2004 and so on.
If you bought back in 2004 you had a chance to temporarily exit at around 28,60€ on November 6th 2007, only to buy it back 2008. This way you would still be on the profitable side even though the share price has declined a lot. Note that Apple launched iPhone back in January 9th 2007.
If you sat on the board of Nokia or was one of the members in the management team you would be in a better situation. Management Team compensation in MEUR can be seen on the left axis and Board compensation on the right axis. As we see management team has partially compensation linked to the result while the board has seen a steady increase while the company has underperformed. I know many argue you must pay to get the best. I disagree with that statement, the best is not driven solely by money, but by the chance to make an impact and improve. It gives them pride and acknowledgement. The ones driven by money will only try to maximize their share whatever the cost, and that price is for the shareholders to pay. Here Nokia seems to be a good example. I do conclude it has been better to sit on the Board or in the management team of Nokia then to be a shareholder. We also have to note that the numbers given are absolute and not per person adjusted. Per person adjusted could give a better picture and there the board members have seen a compensation increase of almost 3,9% per year (2012 to 2019 as 2020 isimpacted by one small meeting fee). Not bad compensation increase given the performance. The management team has more volatile salary as they have more result oriented compensation. On average they have seen an increase of 7,6% per year (2012 to 2019) and 5,9% until 2020. 2020 is a bad comparison year due to change of CEO.
(On left Y-axis is the management team compensation in m€ while the right hand side represents the boards compensation in m€).
How I Traded Nokia Shares
First short-term trade was back in 2013. Bought in the beginning of the year and sold the shares at the end for a small profit. Sheet displays transactions made in 2013 with a small profit of 215,43€ or 34,32% before tax, after tax the profit was 150,80€ or 24,02% (30% tax rate on capital gains). Nokia did not pay any dividends during this period, dividend of 0,37€ was paid in July 2014.
My second trade was done in 2019 with a much smaller return as I found better investments and did not want to wait for the stock to rise. As you can see it was done in a short period from beginning of October 2019 to 11th of October. A gross profit of 0,87€ or 0,84% was made, equivalent to 0,609€ or 0,588%, considering the short period of the trade could be duplicated through the year a proper return would be made.
How could Nokia contribute with value?
Share buyback programs and reducing the amount of shares outstanding and in treasury to the extent necessary in order to still compensate board members and management team when performance is acceptable or better. This is possible as Nokia has cash, they also have short term investments that have performed poorly. Owners of Nokia would have received a better return by investing the amount in an index fund. Opportunity cost should be highlighted here. The board should be able to identify if shareholders can get a better gain somewhere else, then they should distribute the excess capital and let shareholders decide what to do, not the other way around.
These are good options for Nokias management to do their job and increase shareholder value. That is their job and that is why they are paid a lot of money, receive shares and other perks, therefore owners can demand some return. In Nokias defence they have had share buyback programs, however small and not removed most the shares. This action is not value creation, more own reward insurance.
One additional point, 6billion euros in cash & cash equivalents is too much for a company like Nokia (Ericsson has about 3-4 billion euros in cash and has paid a dividend). It makes the management and board sloppy and slow. Comparable companies do not have that much cash and most perform better than Nokia. Maybe something for Nokias board to consider in their next meeting.
Conclusion
Nokia has lost much of owner equity with poor performance over the years and failed to convince all investors and owners. Usually it has been a serial disappointer, with some analysts focusing only on non-IFRS numbers which turned out to be a mistake. Since 2003 a Nokia owner has lost equity due to increased number of shares as well as earlier mentioned, poor performance. The equity change is smaller than the loss from market price which might hurt more. Out of 18 last years Nokia has made a loss in seven of them (2003 to 2020). If I would invest on average 4,4 billion in R&D every year, I would demand a better result than Nokia has contributed.
My own opinion about Nokia is this, for the long run it still is a poor company failing to deliver owner value yet for short term gains it is a good option. Many have made money on Nokia and many have lost a lot, focusing on the last 18 years Nokia has failed to deliver. We shall see if the new CEO Pekka Lundmark can change it for better...
I do not hold any Nokia shares at the moment, I might take short-term long positions (buy shares) in the company if I find the market price undervalued.
No comments:
Post a Comment