Nokia (NYSE:NOK), the Finnish telecom company, changed its dividend policy on Mar. 18 with its Capital Markets Day presentation. After having withheld a dividend payment last year even though the company was profitable, it has now decided to “update” its policy. As a result, NOK stock might have a chance of moving significantly higher this year — if it starts paying out.
Of course, it’s not as though the stock has been languishing. For example, year-to-date (YTD), NOK stock is up from $3.91 on Dec. 31 to $5.22 as of Jun. 16. That represents a YTD gain of 33.5% so far this year.
That said, NOK stock has also risen just over 22% in the past one year. This is not a bad result necessarily, but nothing to really write home about. However, let’s not get picky. After all, both Intel (NASDAQ:INTC) and AT&T (NYSE:T) are still negative in their 12-month performances.
NOK Stock: Estimating the Potential Dividend
Here’s exactly what Nokia’s new updated dividend policy stated:
“Today, Nokia also updated its dividend policy. It is target [sic] recurring, stable and over time growing ordinary dividend payments, taking into account the previous year’s earnings as well as the company’s financial position and business outlook.”
This means that the company will no longer pay a variable dividend as a percent of profits. That is what U.K. and European companies do. Instead, it now wants to follow the American policy of paying a steady dividend. In addition, Nokia provided an updated forecast for 2021, saying that it would “assess the possibility of proposing a dividend distribution for the financial year 2021 based on the updated dividend policy.”
Analysts now estimate that Nokia will make $26.18 billion in revenue this year and $26.7 billion in 2022. Moreover, in the first quarter, the company’s free cash flow (FCF) was about $1.35 billion, based on figures from Seeking Alpha. This implies a run-rate annual FCF of $5.4 billion. That represents a very high FCF margin of 20.6% for this year alone. By 2022, its FCF would be about $5.5 billion.
Using this number, we can estimate the potential dividend payment. Most companies pay out one-third to one-half of their FCF. Let’s say that Nokia decides to pay out one-third, or $1.79 billion. In 2022, the dividend would be $1.83 billion.
Today, NOK stock has a market capitalization of $29.6 billion. So, the one-third of FCF dividend payment in 2021 would represent a dividend yield of 6.04% (i.e., $1.79 billion / $29.6 billion). This implies a dividend of 31.5 cents per share (i.e., 6.04% x today’s price of $5.22).
What to Do with NOK Stock
For comparison, Intel currently has a dividend yield of 2.4% while AT&T has a 7.10% dividend yield. I use these two stocks simply because they are non-performing tech stocks that still pay a dividend. The mid-point between them is 4.75%.
So, if we use a 4.75% dividend yield, NOK stock should be priced at $6.63 per share. Here’s why: if we take the potential dividend of 31.5 cents per share and divide it by 4.75%, the result is $6.63.
This also implies that NOK stock is worth 27% more using its current price and the estimate of $6.63 per share. This is based on a conservative estimate of its dividend payout and a typical dividend yield. But keep in mind that, if the company decides to pay out a higher portion of its FCF, the stock will be worth considerably more.
Moreover, assuming Nokia pays out one-third of 2022 FCF, the dividend yield will be 6.18% (i.e., $1.83 billion / $29.6 billion market value). This implies a dividend of 32.3 cents. Therefore, using a 4.75% dividend yield, the target price is $6.80.
What does this all mean? In my view, sometime between now and the end of 2022, NOK stock will likely rise between $6.63 and $6.80, or to the midpoint of $6.71. That implies a potential return on investment (ROI) of nearly 29% from today. In addition, it could be significantly higher if the payout ratio is closer to 50%.
On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.