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Kodak slashes dividend to invest in digital.
By Amy Yee in New York and Scott Morrison in San Francisco
Financial Times; Sep 26, 2003

Eastman Kodak yesterday announced ambitious plans to shift from its traditional film and camera business to digital technology, challenging established rivals such as Fuji Film, Canon, Hewlett-Packard and Epson.

The company said it would slash its dividend to fund the expansion in digital colour printers, cameras and medical imaging.

Daniel Carp, chief executive, said: "We are acting with the knowledge that demand for traditional products is declining, especially in developed markets."

But the move met a sceptical reaction from investors, who questioned Kodak's ability to catch up with entrenched competitors. Kodak's stock tumbled 18 per cent to $22.15 while shares in most of its rivals were little changed.

Kodak said it planned to spend up to $3bn on investments and acquisitions to boost annual revenues from $12.8bn to $16bn by 2006.

The consumer film and paper businesses will receive no further significant investment and Kodak expects film prices to continue to fall.

Digital business accounted for only 30 per cent of Kodak's revenues last year but the company is aiming for that to increase to 60 per cent by 2006.

The company said it would continue to expand its business making health imaging laser printers and was looking to enter the market for consumer ink jet printers. It will be shutting down some traditional lines such as its slide carousel business.

Kodak has been a leader in photographic equipment for more than a century but has struggled in recent years after being slow to react to the threat posed by digital technology.

The printer market has shifted dramatically in the past two years, with HP driving the push towards digital photography. This has solidified its dominance of the printer market, while at the same time hurting sales of traditional film.

Peter Grant, printer analyst at consultants Gartner, said Kodak had little alternative but to adopt the new strategy.

"It's something they have to do. But they are late and I'm not sure they have the capability to compete with HP, Epson and Lexmark," he said.

Standard & Poor's immediately lowered its credit ratings on Kodak's debt.

The downgrades reflected "doubts about the profit potential of digital imaging relative to conventional photography" and the need to reduce debt given Kodak's rising business risk , said S&P credit analyst, Steve Wilkinson.

Kodak already spent about two-thirds of its research and development budget on digital technology and would increase that figure to 78 per cent by 2006, the company said.

Kodak has entered the printer market before, under a deal with Lexmark, but was forced to withdraw about three years ago because the quality of digital photography was not good enough and the digital camera market still lacked volume.

Annual dividends will be cut by 72 per cent to 50 cents.

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Shares in photography giant Eastman Kodak plunged 18% after it revealed its new strategy to adapt to the growing trend for film-free digital cameras.

Investors rushed to sell the shares after they learned Kodak plans to fund its switch to digital products by cutting its dividend pay-out to shareholders by 70%.

Kodak has cut thousands of jobs this year and watched profits fall as it struggled to cope with the popularity of new, digital photography.

But analysts warned that Kodak's decision - until now - to cling to its focus on its traditional markets of film, non-digital cameras and paper-based photographic printing means it is coming late to a crowded market.

'Declining market'

Kodak, famous for making cheap Brownie cameras in the early days of photography, said it would spend $3bn on acquisitions and investments to develop new, digital business.

It also plans to use the money saved by cutting the dividend, traditionally one of the US stock markets' steadiest and most lucrative payouts. In 120 years, Kodak has never before trimmed its dividend.

"We are acting in the knowledge that demand for traditional products is declining, especially in the developed markets," said Kodak chief executive Daniel Carp.

He set out ambitious targets to lift total group sales to $16bn (£9.6bn) by 2006, and $20bn by 2010.

Kodak's second quarter 2003 sales were $3.35bn, unchanged from year earlier; quarterly sales have come in at roughly $3bn for the last year.

Doubts

But analysts believe that rivals like Canon, Sony, Dell and Hewlett-Packard are already far ahead of Kodak in developing digital photography.

Credit ratings agency Standard & Poor's cut its rating on Kodak's short and long term debts after the presentation, though it said the outlook for the stock was stable.

S&P said Kodak's past track record had been "mixed, and the company really needs to do a much better job of getting costs out to maintain very strong profitability and cash flow".

"They have a lot to do, and I don't know if they can do it," said Leslie Fineberg of American Capitol Investors.

Kodak cut its dividend by 50 cents from $1.80.

Its shares closed down, $4.84, or 17.9% lower, at $22.15. The stock price fall contributed to the fall in the Dow Jones industrial average on Thursday, which closed down nearly 1%

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Highlights for the (second) quarter included a 65% increase in consumer digital camera sales, and an 18% increase in sales of motion-picture origination and print film.

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