This is a follow-up to my previous post
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.
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.