Nokia's Dividend: A Precarious Balancing Act Amid Rising Risks

Nokia (NOK) has long been a bastion of stability in the telecommunications sector, renowned for its dividend discipline. Yet today, red flags are flashing. Elevated payout ratios, deteriorating profitability, and sector-specific headwinds suggest the dividend—long a cornerstone of investor confidence—is increasingly vulnerable. With the June ex-date looming, shareholders must act swiftly to mitigate exposure.

The Payout Ratio: A Ticking Time Bomb

Nokia's trailing 12-month dividend payout ratio has surged to 80%, marking a dangerous overhang. While forward estimates (35% for 2025, 30% for 2026) suggest optimism, they assume a sharp rebound in earnings—a leap of faith given recent trends. By comparison, peers like Wendy's and Kohl's faced brutal dividend cuts after similar mismatches between payouts and eroding profits.

The disconnect is stark: Nokia's payout ratio now exceeds the telecom sector average by nearly 30 percentage points. Even the cash flow payout ratio of 18%—while healthy—cannot offset the earnings dependency. A dividend this reliant on near-term profitability is a risk too great to ignore.

Debt Pressures and Earnings Volatility

While Nokia's net cash of €3.0 billion provides a cushion, operational cracks are widening. The Q1 2025 operating loss of €52 million (USD terms) underscores fragility. The interest coverage ratio—already weak at 4.81 annually—cannot be calculated for Q1 due to negative operating income, a critical warning.

Adding to the strain: US tariffs could slice Q2 operating profit by €20–30 million. This is no minor blip. In a sector where margins are already under pressure, such headwinds threaten to erode the very earnings supporting the dividend.

Sector Risks: A Perfect Storm

Nokia's exposure to global infrastructure spending and telecom upgrades is now compounded by macroeconomic threats. Declining retail spending and REIT sector malaise—key drivers of networking demand—create a demand slowdown. Meanwhile, peers like Ericsson and Huawei face regulatory headwinds, squeezing market share and pricing power.

The parallels to recent dividend cuts in other sectors are stark. Wendy's slashed its payout after same-store sales collapsed, while Kohl's reduced dividends amid a retail exodus. Nokia's reliance on volatile earnings makes it similarly exposed.

Corporate Actions: A Dividend on Life Support

The upcoming June ex-date—marking the record date for the next dividend—comes at a perilous juncture. The proposed dividend of €0.04 per share (up from €0.035 in Q1) assumes stabilization, yet the data tells a darker story:

• Q1 2025 operating margin fell to 3.6%, down 990 basis points year-on-year.
• Free cash flow, while positive at €0.7 billion, depends on cost cuts that may not materialize.
• The Infinera acquisition and restructuring costs—€120 million in Q1 alone—highlight execution risks.

The Write-Off Looming After June

History is clear: companies that raise dividends amid falling earnings often face brutal reversals. Investors holding through the June ex-date risk a “dividend trap”—where the payout is slashed post-ex, triggering a price collapse. The math is simple: if Nokia's payout ratio exceeds earnings capacity, the dividend will be cut, not sustained.

Action: Exit Before the Ex-Date

The prudent course is unequivocal: reduce positions before June's ex-date. The risks are too acute, the payout too fragile. Even if Nokia avoids an outright cut this quarter, the structural challenges—tariffs, margin erosion, and overextended payout ratios—ensure this dividend's days are numbered.

Historically, when similar conditions arose—such as in quarters where the payout ratio exceeded 80% and operating margins declined—the strategy of selling before the ex-date delivered a total return of 51.29%, though it underperformed the broader market's 99.02% benchmark return during those periods. This underscores the trade-off between capital preservation and opportunity cost in volatile environments.

Conclusion: Prudence Over Delusion

Nokia's dividend, once a symbol of strength, has become a liability. With payout ratios at unsustainable levels, earnings in freefall, and macro risks mounting, the writing is on the wall. Investors who cling to this dividend past June do so at their peril. The time to act is now—before the trap snaps shut.