Nokia - Bad News for Dividend Investors

[jebmke]

I agree 100% with the words in your post, with one small exception.
You seem to be implying that many of the people that rely heavily on dividend income also have an adequate cash buffer.

I am curious where you gathered this from?

Again, I think a critical part of any investment strategy is to have enough of a cash cushion so you don't have to sell in a bear market. I see no reason though that investing in dividend stocks precludes one from doing so.

Anyone with a reasonably conservative allocation (healthy dose of bonds) wouldn't be selling stock in a bear market - - they would be buying stock (by selling bonds).

 

[Running_Man]

As one who does believe in solid dividend paying companies, for the discipline they install in a proper dividend company, Nokia has been screaming stay away from me since at least early 2009 when they cut their dividend. I would advise against investing in any stock that cut it's dividend in the last 10 years as a way to avoid companies that will cut dividends to solve financial problems. By not cutting dividends you are forced to address financial problems before they get to the dividend cutting stage. The last thing you want to be is a dividend holder of a company thinking "if this doesn't work out we can just cut the dividend".

Nokia also had the following very strong warning signs that have safely kept me away from the stock:

It is a "4" in safety by value line, meaning it is fiscally in the bottom 25% of all 1700 companies in Value Line along with a B financial Strength, and all other statistical ratings by value line under 65% of all companies. Value line has predicted a dividend cut for nearly 6 months now as well. There is great value of this publication to me as early warning signs for dividend troubles.

 

[jebmke]

By not cutting dividends you are forced to address financial problems before they get to the dividend cutting stage.

While I don't know what the aggregate data would show, from my experience working for several companies, I found that dividend policy didn't have a lot of impact on management tactical decision making. In one case, I worked for a firm that, in order to preserve the dividend during a recession, borrowed so much money that it nearly collapsed. The consequences in this case were dramatic. In order to survive, the rescue management ended up closing down several viable US plants, sold businesses to raise cash that could have contributed to growth and prosperity for the workforce. The business were sold to LBOs (called PEs now) and they were stripped and pillaged like many businesses bought by PEs today.

One the other side, my last employer reduced the dividend in 2001 during that recession in order to preserve cash that was being invested in new technology. The dividend was raised back up in 2003, the stock took off and my NQ options went from my strike price of $11 to over $90.

My point is, that I think it is a myth that dividend policies have a lot of power over management. Incompetent management will find a way to destroy a firm, dividends or no dividends and vice versa.