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Should Apple Become More Shareholder Friendly?

 February 07, 2013 10:40 AM

(By Mani) Should Apple Inc. (NASDAQ: AAPL) become more shareholder-friendly? This is the million-dollar question that came to our mind when hedge fund activist David Einhorn sued Apple and slammed the iPhone maker's capital allocation policy that proposes an elimination of the issuance of preferred stock.

Cupertino, California-based Apple is seeking  approval to scrap preferred stock from its charter at the upcoming Annual Meeting of Shareholders to be held on Feb. 27, 2013. 

Einhorn, who owns more than 1.3 million Apple shares via his Greenlight Capital, urged shareholders to reject the preferred shares proposal as it would curb the company's options to unlock value for shareholders.

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Since May 2012, Einhorn has been toying with the idea of creating of a perpetual preferred stock that would be distributed at no cost to Apple's existing shareholders, and would provide a sustainable dividend.

The activist investor suggested an initial preferred share distribution, whereby dividends could be funded on an ongoing basis by a relatively small percentage of the company's operating cash flow, but Apple rejected it outright in September 2012.

Assuming Apple retains its price to earnings multiple of 10x and the preferred stock yields 4 percent, Einhorn said that every $50 billion of perpetual preferred stock that Apple distributes would unlock about $30 billion, or $32 per share in value.

[Related -Google Inc (GOOG): Why Nest Labs Deal Is A Wakeup Call For Apple Inc.?]

Apple, led by Tim Cook, said it would reconsider the idea, but refused to withdraw the proxy provision where Apple seeks to eliminate preferred stock from its charter. 

"Apple should unlock shareholder value through the distribution of perpetual preferred stock," said Einhorn, an Apple investor since 2010.

As of Dec.29, 2012, the company had $137.1 billion in cash generated $23.4 billion from operating activities. It spends about $2.5 billion a quarter ($10 billion a year) for paying dividends.

In 2012, Apple authorized a program to repurchase up to $10 billion of its common stock beginning in 2013. The repurchase program is authorized through 2015.

Einhorn, who is known for his ability to protest for changes in target companies, hogged the limelight for short selling Allied Capital, Lehman Brothers and Green Mountain Coffee Roasters, Inc. (NASDAQ:GMCR) stock. In May 2011, Einhorn called for the resignation of Steve Ballmer, CEO of Microsoft Corporation (NASDAQ:MSFT), after International Business Machines Corp. (NYSE:IBM) and Apple surpassed Microsoft in market value.

Einhorn sued Apple for bundling three separate matters (majority voting for directors, elimination of preferred stock, and establishing a par value for the company's common stock) into one proposal, which is against SEC rules. 

Several Wall Street analysts have been arguing that it is high time that Apple to augment shareholder enhancement measures as its cash balance is one of the highest among the U.S. technology giants.

Apple has always been apprehensive about returning cash to shareholders. Former CEO Steve Jobs was reluctant in paying dividends and instead used cash for R&D, acquisitions, new retail store openings and capital expenditures in its supply chain.

However, when the successor Tim Cook took the helm in last fall, he began to feel the pressure to initiate shareholder enhancement measures amid a strong feeling that Apple has more cash than its requirements.

Apple resumed paying a quarterly dividend of $2.65 a share in July 2012 after a gap of 22 years and said it plans to return $45 billion to shareholders in the form of dividends and share repurchases.

iStock believes Apple should improve its shareholder value as it has $145 per share of cash on its balance sheet, and the $45 billion payment of dividend and buybacks represents only 33 percent of its current cash position. Thus, even if Apple pays preferred dividends, it would have ample cash in its kitty.

Moreover, preferred shares represent a simple, low-risk way to reward shareholders as it requires no immediate use of cash other than the ongoing dividend, and would not pose any maturity, re-financing, balance sheet, or default risk. Further, it would not force the company to incur tax on repatriating its offshore cash balances. Apple has $94.2 billion cash overseas.

If Apple starts returning more cash, it would further boost investor sentiment and increase Apple shares, which were about 35 percent low from their peak valuation.



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