Why doesn’t RIM pay a dividend to boost share price?

This is a follow-up to my previous post

Why RIM should forget being a tech stock and pay a dividend

which was written in June this year and commented on the fact that Research in Motion (RIM), had healthy financial ratios yet the share price was at a four year low because of lack of confidence in the product roadmap.

In the intervening 6 months things have got steadily worse for the RIM share price.

Today the share price stands at $12.52, a 7 year low.

The market value of the company stands at $6.56 billion (Reuters),

This is less than the book value of the company’s assets less liabilities which stand at $9.24 billion (Morning Star)

Yet RIM can show consistent growth in operating income before taxes :-

2007 – $857m

2008 – $1,818m

2009 – $2,800m

2010 – $3,267m

2011 – $4,644m

RIM clearly has income challenges. In the current financial year it returned an operating income of $265m in the third fiscal quarter. This is compared to $911m in the previous financial year third quarter.

However Rim reports exceptional items in the third quarter such as payments due to service outage and a write down of inventory relating to their unsuccessful tablet device, the Playbook.

Excluding these items gives an adjusted income figure of $667m for the quarter.

Also revenue increased by 24% from the previous quarter and subscriber count was up 35% year over year to 75 million.

(RIM Q3 press release)

So RIM’s business is growing and generating significant cash. But as the Playbook write down shows they still have problems with their product roadmap.

However their perilous market financial position is attracting attention from potential buyers such as Amazon, who could see the company as a bargain in its current state.

So my question is, could RIM change investor outlook and boost their share price by announcing a commitment to a dividend program?

High technology companies in their growth stage typically have not paid a dividend because the thinking is that they can re-invest their earnings to boost the growth of the company. So the money is better invested in the business than giving it to the shareholders.

This thinking is reversed in sectors such as utilities and telecommunications. Here the thinking is that the companies are unlikely to be able to invest in growth projects and so the money is better returned to the shareholders who can then choose to invest in separate growth businesses.

My contention is that RIM should now view itself as a utility company and adopt a dividend policy.

This is consistent with RIM’s business model which is based on signing up subscribers to it’s hosted email service which is the basis of the RIM Blackberry smartphones.

So how much could a regular dividend affect the RIM share price?

Acadamic theory suggests (Watson & Head, Corporate Finance Principles & Practice) that for a company which pays a regular dividend D, and with investor requirements of r% return on the equity market, a companies share price is equal to D/r.

If we take a value of 10% for the acceptable investor return (plausible given the current low interest rate economy), and a dividend per share of $3, we get a share price of $30. (3/0.1)

A dividend per share of $3 would cost RIM $1,572m (524m shares outstanding).

This represents a payout ratio of 46% based on 2011 net income available for distribution.

So this model suggests that if RIM can convince the investment community that it can commit to paying $3 per share in dividend each year the share price would rise from the current $12.52 to $30.

The investment community clearly have no confidence in RIM’s current product roadmap strategy. So they are in the position of the Utility sector, where they are generating cash, and it might be better to return this to the shareholders. This would boost the share price and restore some confidence in the markets by focussing on a hard cash return instead of potential future growth as a tech stock.

The company would still have product roadmap issues to contend with. But for public companies these are easier to deal with if you have the support of the investment community. Which RIM currently does not.

Grand planning versus expedients in business strategy

The phrase “no plan survives first contact with the enemy” is often quoted in the context of business strategy. The source of this quote is often not identified correctly. It was actually Helmuth von Moltke the Elder, a Prussian General who came to prominence in the Franco Prussian war of 1870-1871. (Often confused with his nephew of the same name who was a Field Marshall in World War 1).

He actually said “No plan of operations extends with certainty beyond the first encounter with the enemy’s main strength” and went on to say “Strategy is a system of expedients”.
His point is you can only plan up to a certain point. After that, typically an initial engagement, you have to look at the situation and the options you have available.
Where von Moltke excelled was in analysing and preparing for all possible options. This approach is left out of a lot of business thinking. The focus is on the plan and not on the potential deviations from the plan. And what options are available when the plan doesnt work out.

An interesting example of this theme is shown in “The Honda Effect“, (Pascale, California Management Review, 1996). This compares how Honda’s management team described their approach to entering the US motorbike market in 1960 versus a subsequent analysis by the Boston Consulting Group.

Looking back on the outcome, the Boston Consulting Group, paints a picture of a strategy driven by low pricing and economies of scale leading to market dominance.

In reality the management team describe how they were short on resources, hitting initial problems, and then making expedient decisions based on current situations.

The implication here is that the chances of success are increased by being prepared on how you can respond to multiple options once that initial engagement takes place.

And being receptive to information and events at the point of engagement is crucial.

Zynga IPO

Zynga, the online games provider within Facebook, recently filed for a forthcoming IPO.
Share price has not been announced but it is anticipated that they will attempt to raise $1 billion with a company valuation of $15 -$20 billion.

A valuation of $16 billion gives a 33 times revenue multiple.
By comparison the Linkedin IPO in May gave Linkedin a valuation of 17 times revenue, about half that forecast for Zynga.

Comparing Zynga to Linkedin shows Zynga in a much stronger financial position with a larger user base.

Zynga 2010 revenue was $597m compared to $243m with Linkedin.
Zynga 2010 income from operations was $125m compared to $3.4m with Linkedin.
And Zynga report 116m monthly unique users of their service at end of 2010 compared to 46m monthly unique users of the Linkedin service.

So Zynga is a far more profitable operation than Linkedin and more than double the revenues and user numbers.

So we can expect to see a larger valuation for Zynga than $16 billion.

Myspace – the rise and fall.

News Corp has recently agreed to sell Myspace for $35 million. Myspace, the leading social network before the dominance of Facebook, was purchased by News Corp in 2005 for $580 million.
At time of acquisition Myspace was the 5th most popular web site world-wide. Less than one year later it was the 2nd most popular site and News Corp was claiming in Fortune magazine that Myspace represented the biggest growth opportunity the company had. A Multi-billion dollar valuation was speculated.
Five years down the line and the fast moving nature of the Internet, and in particular the rise of Facebook, has destroyed that value.
Interestingly Myspace has not actually declined in terms of user numbers. It Currently reports 34.9 million users per month. In 2005 at the time of the News Corp acquisition that number stood at 27 million users. So Myspace has been growing, but not as fast as needed to keep pace with the Market it was in.
By contrast Facebook Has recently reported 750 million monthly users. In 2005 at the time of the News Corp Myspace acquisition Facebook’s monthly user number stood at 5.5 million.
So Myspace was 5 times the size of Facebook but News Corp could not keep pace with the subsequent growth of it’s competitor.
It seems like rate of growth is the key indicator for high speculative valuation. But it’s increasingly hard to drive further increases in valuation when the growth starts to slow or even plateau. So can Facebook maintain it’s dominance when it’s user numbers start to plateau (they can’t keep on rising forever). Or will it go the way of Myspace?

Why RIM should forget being a tech stock and pay a dividend

Following my previous article comparing recent financial results between Nokia and HTC
it would be useful to take a look at those of Research In Motion (RIM), the maker of the Blackberry, and whose share price has fallen 50% since their annual results were announced in February.  In fact RIM’s share price is at a 4 year low point with press scepticism regarding their product roadmap and delays in introducing new products.

RIM’s 2011 annual report shows the following key data

Net Sales  $19,907m

Gross Margin  $8,825m

Operating Profit  $4,636m

And here are some ratios with the numbers for Nokia and HTC shown for comparison.

Operating Profit Margin

RIM 23%

(Nokia 11.3%     HTC 15.5%)

Gross Profit Margin

RIM 44.3%

(Nokia 30%     HTC 30%)

Return on capital employed

RIM 50.2%

(Nokia 10.5%     HTC 59%)

Return on Shareholders fund

Rim 38.1%

(Nokia 8.6%     HTC 56%)

Sales Revenue to capital employed

RIM 2.15

(Nokia 2.15     HTC 3.73)

Sales Revenue per Employee

RIM $1.17m

(Nokia $429k     HTC $1.33m)

Price per earnings (17th June)

RIM 5.56

Nokia 8.32

HTC 16.58

Analysis

RIM’s ratios are significantly healthier than Nokia’s, and better in some cases than HTC. Yet they have the lowest price per earnings. I think this is a good example of how the stock market looks considerably forward in their valuation mentality. RIM is making good margins and return on investment, yet their share price is heavily discounted. The markets clearly don’t see a positive future based on RIM’s product line and the mobile phone competitive landscape RIM finds itself in. Even more bleaker than Nokia it seems.

I think there is also a strong North American bias here. RIM’s international sales doubled in 2010 whereas in North America their platform is viewed by some as having peaked and being under threat from Apple and Android devices.

RIM hasn’t paid a dividend in 3 years. So with earnings per share of over $6 and a share price of $26 at time of writing maybe it is time to change this policy and boost the share price this way.

Financial ratio comparison in mobile phone manufacturers

With the recent issues at Nokia concerning their profits warning and share price plummet http://mobilebeacon.com/blog/2011/06/02/nokias-troubles-and-a-lesson-on-software/ , I wanted to do some financial ratio comparison between Nokia and HTC, one of their leading competitors in the fast growing Smartphone segment. I was interested to see what the ratios look like when comparing an established market leader such as Nokia with a smaller more focussed company such as HTC.

The 2010 annual reports show the following key data

Nokia (Devices & Services Division)*

Net Sales -€29,134m  / $38,165m  **

Operating Profit – €3,299 / $4,321m

HTC

Net Sales – $9,569m

Operating Profit – $1,515m

So we have the following ratios

Operating Profit Margin

Nokia 11.3%     HTC 15.5%

Gross Profit Margin***

Nokia 30%     HTC 30%

Return on capital employed ***

Nokia 10.5%     HTC 59%

Return on Shareholders fund***

Nokia 8.6%     HTC 56%

Sales Revenue to capital employed***

Nokia 2.15     HTC 3.73

Sales Revenue per Employee

Nokia $429k     HTC $1.33m

Analysis

These figures certainly suggest HTC is a healthier business.

HTC Operating profit margins and revenue per employee are significantly higher. Interestingly gross profit margins are identical, so this suggests R&D, sales and marketing, and admin expenses within Nokia are proportionately higher.

Return on capital employed and return on shareholders fund are far higher in HTC’s case. A close look at the balance sheet shows Nokia has long term liabilities of over $5b, HTC has very little. Also Nokia has retained earning of over $13b. Cash in the bank effectively, which is not being used as efficiently as HTC uses its cash. Sales revenue to capital employed ratio bears this out.

So Nokia needs to improve its internal efficiency and use its cash pile to generate more business. Probably familiar issues for all large market leading companies.

Where Nokia is especially vulnerable is the fast moving nature of the high-tech industry it serves. Competitors can come up quickly and bad investment decisions can set you back considerably. This is the reason for Nokia’s recent decision to end investment in its own software platform Symbian and partner with Microsoft. By doing this it will reduce its R&D expenditure and hopefully become more efficient internally.

*Nokia additionally has its Nokia Siemens network division plus Navteq maps division. Total sales across the company was $55,604m. So Devices & Services makes up 70% of the total company sales.

** Converted into dollars for comparison using the exchange rate at the end of 2010 as noted in Nokia accounts.

*** calculated based on all Nokia divisions as a consolidated Income statement and balance sheet was used.

7 Steps to build a successful mobile strategy and brand

This is the first of a serious of articles describing how to extend a brand or service into the world of mobile devices. Here we outline the 7 steps which should be worked through to define your strategy before you launch a mobile service.

1. Understand market trends, past and predicted.

The mobile market is fast moving and notoriously difficult to find good quality, accurate data. So get information from as many sources as possible and bear in mind national characteristics if you want to cover multiple countries.

2. Analyse your current audience and content.

Who uses your services and what you deliver today. This will be the basis of your mobile audience and what you will build on to generate success. But it doesnt have to limit you in terms of the target audience.

3. Create a vision for your mobile audience.

What is it you want your mobile audience to do? What will you provide that adds value to their mobile lifestyle and experiences? How will your mobile offering differentiate your brand or service from others on the market? The answers to these questions will help you create a vision of how you can work within the mobile environment and what you ultimately offer.

4. Define initial objectives.

What do you want to deliver and when? How do you generate revenue from the deliverable? How will what you deliver affect your brand, your current audience, and your business partnerships.

5. Specify an initial deliverable for launch.

What can be delivered as an initial release which is low cost, low risk and will provide you with immediate fedback from the market. This is often the best way to start.

6. Identify alliances and supporters.

Who can help you promote your brand and service on mobile. Business partners may be able to help and the ecosystem of mobile manufacturers and operators can offer a lot if there is value for them.

7. Plan a roadmap beyond launch.

As part of the initial plan have a phase 2 in mind and future activities which can grow your initial success. Be prepared to tune and adjust these plans based on feedback from the initial launch.

The next article in the series will focus on mobile market statistics and trends and review the options for generating revenue from mobile apps and services.

Mergers and Acquisitions – The deal of the century

While reading Robert Frank’s ‘The Return Of The Economic Naturalist – How Economics Helps Make Sense Of Your World” I came across his comments on the AOL/Time Warner merger in January 2000

http://www.robert-h-frank.com/PDFs/NYT.1.11.00.pdf

In Frank’s book he claims its the worst piece he’d ever written. This is probably a sensible statement given that the story proclaims the virtues of the $147 billion merger.

The following story in Dec 2009 brings the curtain down on the whole saga as the companies de-merge with combined total market values of  around $38 billion.

http://www.informationweek.com/news/internet/ebusiness/222001597

The scale of the numbers are staggering. No other words for it. $100 billion of shareholder value lost in the space of 10 years in two companies.

The vast majority of the losses were attributable to AOL. At the time of the merger AOL shareholders held 55% of the combined company giving a market value of $80 billion. When spun off in 2009 AOL was valued at $2.5 billion.

Time Warner at the time of the merger was worth a mere $66 billion and when spun off was valued at $36 billion.

The fallacy around the deal was the dot com bubble of the year 2000. When everything Internet related had turned to gold and there were few concerns about valuations far exceeding the industry norms. The hope was Internet access combined with entertainment content was a one way bet. It turned out it was, except it went the wrong way.

We are now speculating that we have returned to another Internet bubble with incredibly high valuations for technology IPOs and acquisitions.

How do we spot a bubble? I think we just need to look out for the next AOL / Time Warner style merger.