David Einhorn’s Apple Conference Call: Full Transcript

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today. That’s compared iPrefs to the conventional idea of nearly doubling the dividend. We can see that for the same incremental distributions, iPrefs will unlock much more total value. If Apple distributed by iPrefs per common share, it would cost $9.5 billion in annual dividends. We just showed why we think this would unlock $150 per share in value. Compare that to Apple adding the same $9.5 billion to the annual common dividend, which would bring the dividend to $20.60 per share. As we discussed, dividend yield by common stock are just one factor that common shareholders look to. We believe that for the dividend to be a primary value driver for Apple’s common stock, it would have to yield 4%. On that basis, Apple would trade at $515 per share, or about $85 less than the iPrefs solution.

In order for Apple to reach the same $600 value, the increased dividend would have to drive the shares to a 3.4% yield. Incidentally, under the iPref program we are assuming that the common stock continues to receive a $10.60 dividend or almost a 3% yield, based on the $350 value. Remember that the issuance of iPrefs doesn’t require Apple to actually use any of it existing $137 billion of cash. Thus, even a very large issuance of iPrefs preserves Apple’s financial flexibility and wouldn’t pose any great mental risk to the company.

IPref holders will be most concerned about Apple’s ability to continue paying the 4% dividend. % dividend. Apple has $137 billion in cash. It earns over $40 billion a year and it is all cash. At our case for the $236 billion preferred with the 4% dividend and it $9.5 billion annual commitment, on that basis Apple would pay out less than a quarter of its earnings and will have 15 years of track — iPref dividend sitting on the balance sheet and cash. We think Apple could eventually support even more iPrefs without arming the required yields. Not– iPrefs our equity, not dead. There’s no such thing as the default. The company has the option to cut the dividend just like it can cut a common dividend, which of coarse, would send a negative message to the market.

Aside from that, cutting the dividend just means that they could can’t be additional payments are distributions to the common stock until Apple catches up on dividends to the iPrefs. While this scenario is unlikely, it is important to understand that there are no circumstances were issuing iPrefs puts the company at risk of failure. The important benefit of iPrefs is that they don’t interfere with what ever Apple’s business plan is. Because, the cash doesn’t go out the door, Apple is return guest it. Speculate where the money is for a large acquisition or a series of acquisitions.

We don’t know what Apple’s plans are. But, I press — iPrefs don’t interfere with using the existing cash if they want to do acquisitions they can do acquisitions. Of Apple one stickies it’s cash overseas that can still do that. If Apple wants to make one-time or recurring dividends or share buybacks, can still do those things. IPrefs will lower apples cost of capital. Thereby reducing the opportunity cost of holding cash and increasing Apple’s financial flexibility. We know that the company is debt averse.

IPrefs are a form of equity, not debt. They have no maturity and no refinancing risk and no default risk. About the business itself is never put at risk. While Apple wants to keep it’s c ake, the shareholders get to eat it too. The iPref program will allow shareholders to recognize the value in the balance sheet by splitting the value between income oriented investors who will want to save dividend and the common shareholders at which — that wish to participate in the increased value of the enterprise. The Mockler will reward Apple shareholders with a higher blended multiple of earnings. Even so, to be conservative, we’ve not assumed an expansion of the PE multiple on the common equity.

Some have wondered if this isn’t just financial engineering. If you don’t change Apple’s p rofits, how can you unlock value? That may be clear about what our idea does and doesn’t do. Of course, I press — iPrefs on a not increase but academics refer to the intrinsic value of Apple. That’s because the concept of intrinsic value presumes that cash flows generated by the enterprise are optimally financed, so as to minimize the firm’s cost of c apital. It presumes that the company will assess all available financing sources, equity, fixed income or otherwise, to minimize it’s cost of capital. Therefore, maximize the valuation of its cash flows.

In practice, most publicly traded companies are appropriately capitalized and consequently trade at market valuations commensurate with their so-called intrinsic values. This particular idea would not help most companies. But, Apple Inc. (NASDAQ:AAPL) is different. Apple is not appropriately capitalized. It is not minimizing its cost of capital. This is one reason why we believe Apple’s share is trade at a valuation well below it’s intrinsic value. Apple has now established itself as a phenomenal franchise with a sustainable earnings stream that generates cash every day. The fixed income capital markets are quite available to Apple, but it simply chooses to access them.

By creating iPrefs, Apple will immediately reduce it’s cost of capital from the top quartile of the market where it sits today, to the bottom quartile of the market where it deserves to be. This would allow Apple’s shares in this to appreciate towards their intrinsic value. What does Apple management give up? Nothing. They would just be making explicit a promise that we believe they are already making implicitly, which is that all of Apple’s cash is to be used in the disciplined fashion and none of it is to be played with. By making this promise explicit, we suspect Apple management would be doing nothing new except now they would get credit for it in the capital markets.

Let’s compare iPrefs to the conventional alto details for the work is of calculating unlock value. Range of outcomes is pretty wide. We can see most of the numbers fall in the low five hundreds in total value. Depending upon how much credit the market is currently giving Apple for its cash, they outcomes for increasing the dividend could be even lower than that. At $600 of total value, iPrefs unlock $61 per share more than the second best alternative. You can see that quantitatively iPrefs gives Apple shareholders the greatest benefit Dirk as reviewed earlier, we only assume PE multiple expansion in the cases of ongoing repurchases and doubling the dividend. If the iPrefs leads to a higher PE multiple, than the disparity will be even greater.

Qualitatively, we think iPrefs are best for Apple. And iPref program uniquely allows Apple to maintain complete flexibility to pursue innovation, execute its disciplined acquisition strategy, set money aside for more than 40 days of rain, remain debt-free and delay repatriating cash until the tax laws change. I guess to do all this and that the same time reward shareholders in a big way. Greenlight has been an Apple shareholder since 2010. We are not just owners of the s tock, we are owners of their products. We want them to keep innovating and to keep designing products that we can’t imagine ever having lived without.

We would never think of suggesting anything that could interfere with them doing that. We know they embrace innovation and can recognize it when they see it. Even if it isn’t the kind of innovation people usually think of when they think of Apple. We hope Apple agrees with us when we say that iPrefs an innovative idea whose time has come. Apple filed it’s proxy in early January and we were surprised to see proposal number two, which eliminates the ability for the company to issue preferred stock. We discussed with the company in the middle of last year our innovative proposal for perpetual preferred stock which there CFO dismissed for several reasons, we did not deem substantive.

In the last week, Mr. Cook has called the idea creative and said that Apple would study the proposal carefully. We look forward to meeting with Mr. Cook and his team shortly. We continue to ask all shareholders to vote against proposal number two. It will send a clear message to the board that we are all dissatisfied with apples capital allocation policy. After all, the direct or stated that the main reason for eliminating preferred stock from the charter was because they did not intend to issue preferred stock in the future.

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