Apple Inc. (NASDAQ:AAPL)’s $137 billion cash stash is the topic of a webcast being hosted by David Einhorn’s Greenlight Capital hedge fund. David Einhorn believes the tech giant should issue perpetual preferred stock to investors in order to return some of that cash to investors. He even filed a lawsuit against Apple Inc. (NASDAQ:AAPL) over the issue.
His lawsuit takes issue with Proposal #2, which is one of the proposals up for a vote at the next shareholder meeting later this month. David Einhorn believes that the proposal will limit the company’s ability to distribute preferred stock in the future, although Apple CEO Tim Cook has said that the only think the proposal would do is give shareholders the power to vote on the issuance of preferred stock.
The judge that’s presiding over the suit filed by Einhorn against Apple Inc. (NASDAQ:AAPL) said on Wednesday that he believes Einhorn just might have a case. So today Einhorn is taking his push against Proposal #2 to shareholders directly through a live webcast. He is expected to fully explain exactly why he thinks shareholders should vote against Proposal #2.
The webcast starts at 2 p.m. Eastern, so you will start seeing updates here shortly after that.
2:00 PM EST:
We are all set to do live blogging of this event. Stand by for updates.
2:08 PM EST:
David Einhorn thanks us for joining him on short notice and gave us his legal disclaimer.
2:10 PM EST:
Einhorn praises Apple Inc. (NASDAQ:AAPL)’s innovation but said there’s a problem to the way it spends and stockpiles cash. He isn’t offering advice for how to run their business. Preferred stock is simple and innovative, according to Einhorn. He talks about the usual solutions and why they won’t work for Apple. He just wants to unlock the most value for shareholders without affecting the company’s plan.
2:12 PM EST:
Einhorn discusses conventional wisdom in the tech industry: “We need cash!” Some tech executives believe there’s no value in buybacks or dividends. He uses Dell as an example. The company let cash pile into its balance sheet.
2:16 PM EST:
The value of cash decays over time, according to Einhorn. He said cash earns a return that’s lower than capital, so the market discounts the cash that sits on the balance sheet. So basically, he said cash isn’t worth as much as other assets.
Einhorn also looked at other examples like IBM and Texas Instruments, which operate with net debt. He said they are considered to be friends of shareholders because of its cash handling views. He said cash-rich balance sheets are a problem in shareholders’ views.
2:18 PM EST:
Einhorn debunked a myth about growth companies. He said, “Cash distributors can still be great growth businesses.” He points out that the company’s cash is much more than it needs. He also points out that $43 billion is domestic cash, and the rest is overseas.
2:22 PM EST:
Einhorn said Apple can either unlock value by returning cash to investors or by finding something productive to do with the cash. He highlighted the options: distribution, repurchase, or dividends. He said the company could do a combination but explained them separately.
He started out by assuming that Apple Inc. (NASDAQ:AAPL) brings much of its foreign cash home. He isn’t advocating repatriating cash and believes that the company can return value without repatriating cash.
He sees a one-time special dividend could come out to $89 per share and then went into the amount of value that would unlock. But there’s no way to know exactly how much value would be unlocked.
2:26 PM EST:
If a dividend done grudgingly, investors will add less value to the stock. According to Einhorn, we saw this with Microsoft Corporation (NASDAQ:MSFT) in the past.
Next Einhorn looked at a one-time share repurchase. If Apple buys back 15 percent of outstanding shares, he sees up to $89 per share of value unlocked, just like the one-time dividend. However he said this is better for tax purposes.
He then looked at large ongoing share repurchases. If the company spends all of its free cash on buybacks, it would unlock value and push earnings growth faster, but calculating the value is harder. He believes Apple could buy back about 6 percent of its shares this way and that the company’s stock would rise 10 to 20 percent. However the tax rate for the company would go up.
2:30 PM EST:
On the other hand, Einhorn said if it doubles its dividend to $21.20 per share, then it likely will not help the company’s price / earnings ratio.
Next he looks at Apple’s history, reminding us that the company once went to Microsoft for help. But then it innovated so much and so well that it grew rapidly and its balance sheet became bloated with cash. Apple’s attitude toward cash management is non-innovative, unlike the rest of the company.
Einhorn went over Apple Inc. (NASDAQ:AAPL)’s capital priorities. It wants to pursue innovation and acquisitions and set aside cash for more than 40 rainy days, and remain debt free. Then he explained his idea of perpetual preferred stock.
2:35 PM EST:
Each preferred stock has a face value of $50 and a dividend of $2 per share every year. The company could buy back the stock whenever it wanted. Holders of the stock should expect 50 cents in dividends per quarter forever. He believes the stock would trade around face value. He also recommends that Apple start small. So he suggests that each shareholder receive one share of preferred stock for every one share of common stock they own. He also said starting small would give Apple a chance to test it before going all-in.
According to Einhorn, there are few companies which offer quality, safe stocks. Most are issued by highly leveraged institutions.
2:38 PM EST:
He said the preferred stock might trade lower at first because some shareholders might want to sell it, but the stock would stabilize and be better in the long-term for investors. He believes the market will accept the stock as a premium quality instrument. Then he went into some of the math about why preferred stock is Apple’s best option to unlock value.
2:41 PM EST:
How Einhorn believes preferred stock would affect the common stock: a reduction by about $20 per share. However there is a great value addition through the preferred stock. So there is a net gain for shareholders who keep the preferred stock.
He said every time Apple can establish a price for its preferred stock, then it can distribute even more. Einhorn also said he believes Apple doesn’t need to repatriate any of its cash because it can do this through its current cash flow.
2:43 PM EST:
Einhorn explained why preferred stock is better than the conventional view of doubling the dividend. He believes preferred stock would unlock $150 per share of value unlocked, while doubling the dividend would only unlock about $65 per share of value. He also said this plan wouldn’t cut into Apple’s cash stockpile because the company has free cash flow that would more than cover the dividends on the preferred stock.
He points out that preferred stock is good because there’s nothing bad that would happen if it can’t pay