while at the same time hold onto its cash to pursue it’s existing business strategy.
In addition, Apple can capture a new demographic that it currently doesn’t serve. Investors looking for save recurring income work product may seem complicated or uninteresting, but we are going to show you how simple and exciting it is. Here is a product that Apple doesn’t yet know that it needs. Introducing iPrefs, a perpetual preferred stock solution. IPrefs are the creative ways to unlock significant value for shareholders and publicly traded cash-rich technology companies. What is a perpetual preferred s tock? It’s a stock that pays quarterly dividends, literally forever. It has no maturity. While Apple would have the right to redeem it at face value, we don’t expect them to ever do so. And iPrefs is a per share a perpetual preferred stock. It has a base value of $50 and pays a dividend of two dollars per year.
Apple can distribute iPrefs tax-free and at no cost to existing Apple Inc. (NASDAQ:AAPL) shareholders, so Apple can redeem them for their face value, shareholders should not anticipate getting the $50 from Apple. Theoretically, if Apple has ever won down, iPrefs holders would receive $50 each before common shareholders receive anything. But, no one should expect either of those two things to happen. IPrefs holders should expect to receive $0.50 a quarter in dividends every quarter forever. The iPrefs will be registered and listed. When Apple shareholders receive them they can either keep them for the future dividends, or sell them into the market. We believe that iPrefs will trade at approximately face value subject to future changes and long-term interest rates.
As this is a new concept, we would recommend that Apple start small. We thought distributing $50 billion worth of iPrefs would be a good number. But, with 945 million shares outstanding, that meant for each share of common stock shareholder would receive one point euros six iPrefs’. To simplify the math, we suggest they distribute $47 billion more to I preps which neatly works out to one iPrefs per share of common stock. At that size Apple would pay $470 million in quarterly dividends to iPrefs holders. The purpose of starting small is to give the market an opportunity to develop and stabilize.
Initially there may be an imbalance between the demand for iPrefs and Apple Inc. (NASDAQ:AAPL) shareholders that don’t wish to keep the iPrefs because current Apple shareholders, imputing us, are mostly interested in Apple’s growth and the capital appreciation of the common stock. The iPrefs should attract a different investor base that is interested in safe income. With them, of 4% payment stream from Apple and a highly liquid securities taxed at the favorable dividend rate will be very enticing. Over time, we expect that there will be strong demand for iPrefs from this group, which will enable Apple shareholders who wish to sell to receive a good price.
Starting small will enable the market for iPrefs to develop and for Apple to evaluate the success of the idea before proceeding to make it a larger commitment to the iPref program. As a result of the zero rate interest policy, there is a widespread need for safe income. There are very few high-quality corporate issuers that offer sizable amounts of safe income paying instruments and there are none that approach Apple’s quality. It is a little hard to find good comparisons to demonstrate how the iPrefs will trade. Walls preferred stocks are issued by highly leveraged financial institutions. As for technology borrowers, Microsoft’s thirty-year AAA rated paper yields 3. 3.9%, IBM’s thirty-year double A- rated paper yield the same as Microsoft.
We think Apple should at East be comparable to those. On a pretax basis, Apple’s 4% preferred would offer an 80 basis point credit spread to the thirty-year US bond and a small spread to very high-quality corporate bonds. The trot the iPref — the iPref dividends will be taxed at the lower dividend rate. Taxable investors on an after-tax basis would are earn the 1.3% more than bonds and about nine tenths of a percent more than high-quality corporate bonds. When Apple initially distributes the iPref, they might trade a bit cheaply at first as this will be a large issue and many common shareholders that aren’t interested in safe income will look to sell.
Over time, the size might turn into a benefit, because the iPref should be highly liquid and could even garner a liquidity premium and serve as a benchmark. Obviously, if Apple issued a very, very large amount, the market would demand a higher yield. However, nothing we are suggesting today would approach that level. We expect the market to accept the iPrefs as a premium quality instrument. This opens up a whole new market for Apple. Right now, there is a great demand for yield. For sabers across the country, this product is desperately needed. To receive a 4% income yield from someone who simply won’t fail is quite exciting, relative to buying a CD. And, we know that the company that created iTunes, we know what they think about the value of buying C Ds. We’ve introduced the idea of iPrefs and explain how they were.
Now, we are going to get into some of the math to show you how much value Apple Inc. (NASDAQ:AAPL) can unlocked and how come — and how this compares to the other options. While the concept of iPrefs a simple, some of the map can get a little hard to follow in this kind of format. We are going to do our best to keep it as simple as possible. Once the iPrefs is distributed for free to existing shareholders, they have an ongoing dividend which Apple must pay out. An example of a $47 billion I prepped distribution, the annual payment by Apple is about $1.9 billion. Of course, iPref dividends reduce income available to the common shareholder. As a result, consensus estimate that Apple will earn about $45 per share would be reduced by two dollars per share to take into account the iPrefs dividends. This means Apple would now earn about order three dollars per s hare.
If you apply a constant PE multiple on the new Apple earnings pop Apple common stock would have a new price of $430 per share versus the current $450 per share. That’s a reduction of $20 in the price of the existing Apple common equity. Although the value of the common equity is now lower, if you add the value that the shareholder gets from Bob iPrefs he receives the total is a net gain.
In the example of a $47 billion iPref issuance the holder one share of Apple common stock receives a iPref with $50 which is added to the new value of the common stock which is $430. That is $480 of total value which is $30 higher than the current stock price. Once the market establishes the trading price for not iPrefs, assuming that it approximates our expectation, Apple can roll out the program and reward common shareholders with additional distributions. Every time the Board determines that Apple can increase it’s general dividend capacity by $2 billion, it can distribute an additional iPref for each common share.
Once Apple distributes a total of five iPrefs per common share it would have a commitment similar to doubling the current common dividend. Even Apple’s current financial position, we believe this would be an appropriate near-term Paul. While iPref distributions combine with the existing dividends would exceed Apple’s domestic free cash flow, we estimate that Apple could bond iPrefs from domestic cash flows and the existing domestic cash balance without ever needing to repatriate foreign cash, assuming Apple achieves consensus forecasts.
Here is the math on distributing five iPrefs per AppleShare. It shows the reduction in net income available to the common stock and earnings per share. Distributing five iPrefs per AppleShare results and $9.5 billion in annual dividends, or $10 per common share. This reduces Apple’s earnings per share $45 to $35 at a constant PE multiple of 10, the new Apple price is $350 or $100 less than the current price of $450. Again, even though the value of the common equity is now lower, the combined value to the shareholder is the net gain. In this example, of a $236 billion distribution of five iPrefs per common share, the holder of one share of Apple common stock receives $250 worth of iPrefs and still has the common stock worth about $350 per share.
We expect the total value to be about $600 per share, or $150 higher than the current stock price
