Ericsson cuts dividend after quarterly loss

Follow up to prior analysis

  • The Network segment is showing signs of recovery
  • ERIC reduces the dividend by ~72%
  • I still consider ERIC a buy, as my fair value estimate is above SEK 70
  • Q4-ERIC

ERIC reported higher fourth-quarter revenue than analysts predicted (+22% QoQ) offering some relief to new Chief Executive Officer Börje Ekholm as he tries to stabilize the Swedish wireless network maker. ERIC comments that the negative industry trends remained in the fourth quarter, and that sales were positively impacted by favorable currency exchange rates combined with hardware deliveries, previously planned for Q1 2017. Reported revenue increased by 22% QoQ, and decreased by -11% YoY. Even if revenue grew more than expected, COGS was also slightly higher, resulting in a modest Gross profit of SEK 17bn.

The Network segment is showing strong sequential growth (39% growth QoQ in sales), indicating a starting point to the recovery. The Global service segment is also showing signs of stability as sales grew by 19 QoQ (6% down YoY). EBIT for Global service was significantly lower than expected. This seems fairly irrelevant to me, as Operating expenses increased QoQ, due to higher restructuring charges.

The cost and efficiency program, first initiated in November 2014, is tracking to target of an annual run rate of operating expenses, excluding restructuring charges, of SEK 53 bn by the second half of 2017. R&D and Capex is down 7% and 20% QoQ.

ERIC reduced its dividend by 72 %, with its new CEO saying the Swedish company would prioritize profitability after it suffered an operating loss in the last three months of 2016.

The Board will propose a dividend of SEK 1.00 (3.70) per share to the AGM. The Board believes that it is prudent to align the dividend level with 2016 earnings adjusted for restructuring charges and the current market outlook. However, the Board expresses confidence in the ongoing actions to improve Ericsson’s financial performance, and has the ambition to increase the dividend over time as our performance improves“.

The 1.00 SEK dividend was well below consensus expectations of SEK 1.73, and especially below my expectations, as I thought that it would be highly unlikely that ERIC would lower the dividend by more than 10 percent.

*Cash available to satisfy finance providers (CATSFP) is calculated by; OCM – (Invested)/Generated from Net Working Assets – Net Capex – Taxes. CATSFP is therefor the total cash available for dividend payment.

As we can see, the guided dividend of SEK 3258M represents a 37% payout ratio of CATSFP. The low payout ratio indicates an expectation of future M&A, as I otherwise see no reason for cutting the dividend so low. The reduction of dividend is definitely not positive as ERIC’s return to shareholders has been solely delivered through dividens with an ~90% payout ratio in the past five years.



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