Nokia's Share Buyback: A Strategic Move or a Waste of Cash?

Nokia's share buyback program is back in the spotlight. The Finnish telecommunications giant announced on 27 December 2024 that it had repurchased 875,685 of its own shares at an average price per share of approximately EUR 4.27. This brings the total number of shares repurchased under the program to 220,370,243, with a total cost of EUR 3,740,926. But is this a strategic move by Nokia, or is it a waste of cash?

Nokia's share buyback program was initiated on 22 November 2024 to offset the dilutive effect of new Nokia shares issued to the shareholders of Infinera Corporation and certain Infinera Corporation share-based incentives. The program targets to repurchase 150 million shares, for an aggregate purchase price not exceeding EUR 900 million. The repurchases are expected to reduce Nokia's capital and offset the dilution from issuing additional shares. The repurchased shares will be cancelled accordingly, which will reduce the Company's total unrestricted equity.

The market has reacted positively to Nokia's share buyback program. Nokia's stock price has increased by 1.5% since the announcement of the program on 22 November 2024. However, it's important to consider whether this is a good use of Nokia's cash.

Nokia has a strong balance sheet, with total cash and current financial investments of EUR 8.8 billion as of 2024-12-28. This gives Nokia the financial flexibility to repurchase its own shares. However, it's worth considering whether this is the best use of Nokia's cash.

Nokia could use its cash to invest in research and development, make acquisitions, or pay dividends to shareholders. These alternatives could potentially generate higher returns for shareholders than a share buyback. For example, Nokia could invest in 5G technology, which is a growth area in the telecommunications industry. Alternatively, Nokia could acquire a company that complements its existing business, or pay a dividend to shareholders, which would provide them with a steady income stream.

On the other hand, Nokia's share buyback program could be a strategic move. By reducing the number of outstanding shares, Nokia can increase its earnings per share (EPS) and return on equity (ROE). This could make Nokia's shares more attractive to investors, potentially leading to an increase in the company's share price. Additionally, the share buyback program could signal to the market that Nokia is confident in its future prospects, which could also be positive for the company's share price.

However, it's important to note that share buybacks don't always pay off for investors. Since 1999, companies that reduce their share count by up to 2.5% return about the same as those that hold their share count flat over the next year, when adjusted for volatility, observes Adam Parker, founder of Trivariate Research. Even a large share-count reduction resulted in only a slight outperformance, suggesting that “deploying capital elsewhere—on average—would have been more prudent,” he says.

In conclusion, Nokia's share buyback program is a complex issue. While it could be a strategic move that increases Nokia's EPS and ROE, it's also possible that Nokia could generate higher returns for shareholders by investing in research and development, making acquisitions, or paying dividends. Ultimately, the success of Nokia's share buyback program will depend on the company's future performance and the market's reaction to the program. Investors should closely monitor Nokia's progress and consider the potential alternatives before making a decision on whether to buy or sell Nokia's shares.