The Evaluation of the Stock of Nokia Corporation - Case Study Example

Name Tutor Course Date Corporate Finance Introduction Nokia Corporation is one of the leading mobile devices manufacturers. The company sells these devices and also provides other related solutions like internet services, digital mapping, and navigational services across the globe. Most of these portfolios are mobile devices like phones, mobile computers, phone application and services, Smartphone, and contents. The company has experienced tremendous growth for the last two decades since its inception. With its stability in the mobile application market most investors are looking for tangible information to help them make informed choices of investments. Value investor as fundamental analysis The stock that is going to be valued in this assessment is Nokia’s Corporation. Specifically, valuation will be concerned about the price per share of the total issued shares that Nokia issued by the end of December 2010, this will represent a fundamental value investor analysis. These shares are therefore the ones yielding the dividends for 2011 to the shareholders. The total number of shares issued by the Nokia Corporation on 31st December, 2010 was 3,744956052 (Nokia 72). The current task is aimed at determining the investor value of Nokia Corporation stock using the dividend growth model as a representation of value investor criterion. Comparison of the perspectives The perspective of choice is the value investor as opposed to the growth investor. A value investor makes judgment on whether to invest in a given stock if the future value of the stock is more than the current value and thereby signifying positive return on investment. On the other hand, a growth investor makes his or her investment based on the growth pattern of a company’s stock. If the value of the stock has been rising consistently over the last few years, it is likely that the company will continue posting positive results into the near future. This criterion would ambitious make informed decisions prior to their investing in the corporation. The growth investor therefore, invests in stock that has registered growth in the last few years in the hope that these trends will continue. Evaluation Ross asserts that when the dividend of a corporation grows steadily, what transpires from this is the issue of forecasting the infinitive value for the coming dividend (235). This is substituted by simplistic problem of elucidating a uniform growth rate. For instance, if  is taken as the paid dividend while g representing a constant growth rate, we could end up with a stock share value as shown below: Provided that the rate of growth (g), is lower when compared to the discount rate (r), However, we can simplify the current value for this cash flow series as shown in the equation below: The above function is what is commonly refereed to as the dividend growth model. This model has various names including the Dividend Discount Model or (DDM). According to Nguyen this Dividend Discount Model categorizes as an absolute valuation model (1). This method is used in computation of the true or intrinsic value of an investment based on fundamentals. Consequently, this Model focuses on dividends and growth rate of one company without worrying about the other competing firms. Proponents of this model argue that it is justified to use dividends to value a company as dividends represent the actual cash flow going to the shareholders. Valuing the current value of these cash flows is therefore pivotal way of determining the worth of the shares. The worth of any stock is equal to the current and future dividends that it will provide to the shareholders. The DDM is based on the idea that any stock value worth’s the total coming cash flow expectation of the company generation, discounted as an appropriate risk-adjust rate (McClure 1). Based on McClure (1), valuation of a firm based on DDM aims at computing the values for the dividend payment that the stock throws-off in the future. The model states that at zero growth: Where:- P represents pricing at time 0 r represents rate of discount (Required return) Div. =Dividend The above equation yields the per-share volume and is an extension of the ordinary perpetuity problem discussed above which can be summarized as below:- Where:- R= Required return D=Dividend (cash flow to D due to the shareholder) If Nokia’s dividends due to the Corporation’s shareholders increase by steady rate of interest tat we will assign the letter g and the letter D0 to be the dividend that is paid to the shareholders. In this case the corporation’s shares stock value would be given as: But since the Dividend t period into the coming period, Dt represents b: we can deduce that: This equation depicts cash flows that grows with a constant rate into perpetuity (forever) and is known as the growing perpetuity. Although the issue of steady dividend growth might seem strange, this kind of growth is a clear objective in many companies including Nokia Corporation (Ross 234). This equation can be substituted into the equation above to give new values of. Therefore the above equation can be written as: This yields the Dividend Growth Model (DGM) given by: If we look at the share trend information given below for Nokia Corporation, we will we can compute the per-share value of the Nokia stock for any time in the future. Table 1 Share capital and shares December 31, 2010 2010 2009 2008 2007 2006 Share capital EURm 246 246 246 246 246 Shares (1000) 3 744 956 3 744 956 3 800 949 3 982 812 4 095 043 Shares owned by grouping (1000) 35 826 36 694 103 076 136 862 129 312 Number of share not including the values owned by Group (1000) 3 709 130 3 708 262 3 697 872 3 845 950 3 965 730 Average number of share not including the shares owned by grouping (1000), basic 3 708 816 3 705 116 3 743 622 3 885 408 4 062 833 Average number of share not including the shares owned by grouping (1000), diluted 3 713 250 3 721 072 3 780 363 3 932 008 4 086 529 Number of registered shareholders 191 790 156 081 122 713 103 226 119 143 Source: (Nokia 5) Table 2 Key Ratios December 31, 2010, IFRS 2010 2009 2008 2007 2006 Earnings per share, basic 0.500 0.240 1.070 1.850 1.060 Earnings per share, diluted 0.500 0.240 1.050 1.830 1.050 P/E Ratio 15.480 37.170 10.370 14.340 14.600 (Nominal) Dividend per share, EUR 0.400 0.400 0.400 0.530 0.430 Total Dividend paid, EURm 1 4980 1 4980 1 5200 2 1110 1 7610 Payout Ratio 0.800 1.670 0.370 0.290 0.410 Dividend yield, (in %) 5.17 4.48 3.60 2.00 2.80 Shareholder equity for every share, EUR 3.88 3.53 3.84 3.84 3.02 Market capitalizations, EURm 28 709 33 078 41 046 101 995 61 390 Source: (Nokia 5) Summary of annual dividend paid Stock Price (27.05.2012) $ 4.54 Expected Return 24.56% Year Dividends Annual Growth 2005 0.43 2006 0.472 9.77% 2007 0.57 20.76% 2008 0.401 -29.65% 2009 0.4 -0.25% 2010 0.4 0.00% 2011 0.48 20.00% Growth Factor (10 y) 3.44% Expected Dividends 0.50 R 14.37% P0 $ 2.35 Source: (Nokia 5) From table 2 above, it is possible to compute the value of g by finding the average % dividend yield from 2006-2010 as: Using the DGM discussed above, We assume that the dividend per share will remain constant at 0.40 EUR for the next few years (as has been the case from 2008-2010), and the expected return R IS 14%. The price per share of the Nokia stock in 2011 for this case will be: If we recall that the total number of shares issued by the Nokia Corporation on 31st December 2010 gave 3,744,956,052 and share capital was 246 000 000 EUR. Then actual price per-share in 2011 was: From the computation using g is 0.4 and R is 14%, the investor expected the price of Nokia stock to be at as at R equals 14% he expects  The reality is different as the stock shows a real yields  per share. The investor should not invest in the company as it is. Under-valued stocks In this stock analysis, the current selling price stand at $ 2.71, which is a decline of -0.0185 (-0.68%) from the previous value. This represents a growth price of $ 5.21 which is undervalued by 92.04 %, while the stability pricing is $ 7.65 again this is undervalued by 82.20% (Nokia 5). From this analysis we can deduce that the stock value is undervalued in all financial segments. Recommendation I would opt for buying the stock from Nokia Corporation based on these financial analyses. My recommendation for this choice is based on the value investor analysis. At this financial point, even though Nokia Corporation stocks are undervalued, owing to volatility in the market segment, there is good expectation for investors to reap more from their cash investments in the coming financial years. The past financial records of the company should be the basis in which informed decision for investing be based. Nokia Corporation boosts of this owing to its sound financial infrastructure in mobile industry. Works Cited McClure, Ben. Digging into the Dividend Discount Model. investopedia, 2011. Web. 22 May 2012. Nguyen, Joseph. How to Choose the Best Stock Valuation Method. Investopedia, 2011. Web. 21 May 2012 Nokia. Nokia in 2010: review of the Board of Directors and Nokia Annual Accounts 2010. i.nokia, 2010. Web.21 May 2012. Ross, Westerfield Jordan. Fundamentals of Corporate Finance, Ninth Edition, Alternate. New YORK: The McGraw-Hill Companies, 2010. Print. Read More