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Stock Strategist

Kodak's Digital Road to Nowhere

The firm's risky growth plans will destroy capital and hurt investors.

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 Eastman Kodak's (EK) announcement last week that it would divert cash from its dividend to digital-related investments and acquisitions is a case study in dumb management decisions. Granted, the firm is in a tough spot, but Kodak would be far better off milking its traditional film-based businesses for cash and returning most of that cash to shareholders than throwing away billions on a digital strategy that has very low odds of success.

Kodak still has a defensible position in the medical, entertainment, and government imaging markets where switching costs for end users are relatively high, and margins are still decent. Moreover, the traditional film business is still growing outside the U.S., Europe, and Japan, and is still very profitable even in the developed economies where consumers are switching to digital. The key word here is profitable: Even if film-based markets are slowly declining in much of the world, Kodak still makes money from them.

Pat Dorsey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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