NOK share: with clear free cash flow, dividend outlook is high

Nokia (NYSE:NOK), the Finnish telecommunications company, changed its dividend policy on March 18 with its Capital Markets Day presentation. After withholding the payment of a dividend last year when the company was profitable, it has now decided to “update” its policy. As a result, NOK stock could have a chance to rise significantly this year – if it starts paying off.

Of course, it’s not like the stock is languishing. For example, since the start of the year (year to date), NOK stock has gone from $ 3.91 on December 31 to $ 5.22 on June 16. This represents a gain of 33.5% since the start of the year.

That said, NOK stock has also risen just over 22% over the past year. It’s not necessarily a bad result, but nothing to write home about. However, let’s not be picky. After all, both Intelligence (NASDAQ:INTC) and AT&T (NYSE:T) are still negative about their performance over 12 months.

NOK share: Estimate of the potential dividend

Here’s exactly what Nokia’s new updated dividend policy said:

“Today Nokia also updated its dividend policy. This is the target [sic] recurring, stable and increasing ordinary dividend payments over time, taking into account the results of the previous year as well as the financial situation and business prospects of the company.

This means that the company will no longer pay a variable dividend as a percentage of profits. This is what UK and European companies are doing. Instead, he now wants to follow the American policy of paying a constant dividend. Additionally, Nokia provided an updated forecast for 2021, saying it would “assess the possibility of offering a dividend payout for fiscal 2021 based on the updated dividend policy.”

Analysts now estimate that Nokia will achieve $ 26.18 billion in revenue this year and $ 26.7 billion in 2022. Additionally, in the first quarter, the company’s free cash flow (FCF) was around $ 1. , $ 35 billion, based on the numbers In search of the alpha. This implies an annual FCF of $ 5.4 billion. This represents a very high FCF margin of 20.6% for this year alone. In 2022, its FCF would be around $ 5.5 billion.

Using this number, we can estimate the potential dividend payout. Most companies pay one-third to one-half of their FCF. Let’s say Nokia decides to pay a third party, or $ 1.79 billion. In 2022, the dividend would be $ 1.83 billion.

Today, NOK stock has a market capitalization of $ 29.6 billion. Thus, a third of the 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 the current 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 dividend yield of 7.10%. I use these two stocks simply because they are low performing tech stocks that always pay a dividend. The midpoint between them is 4.75%.

So, if we use a 4.75% dividend yield, the NOK share should be valued 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.

It also implies that the NOK share 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 typical dividend yield. But keep in mind that if the company decides to pay a higher portion of its FCF, the share will be worth considerably After.

Also, assuming Nokia pays a third of 2022 FCF, the dividend yield will be 6.18% (i.e. $ 1.83 billion / market value of $ 29.6 billion) . This implies a dividend of 32.3 cents. Therefore, using a dividend yield of 4.75%, the target price is $ 6.80.

What does all this mean? In my opinion, by the end of 2022, NOK stock will likely rise to between $ 6.63 and $ 6.80, or to the midpoint of $ 6.71. This implies a potential return on investment (ROI) of almost 29% as of today. In addition, it could be considerably higher if the payout ratio is closer to 50%.

As of the publication date, Mark R. Hake does not hold (directly or indirectly) any position in any of the stocks mentioned in this article. The opinions expressed in this article are those of the author, submitted to InvestorPlace.com Publication guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and run the Total Value of Return Guide that you can consult here.