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Many people who suffered through the Great Depression grew severely distrustful of financial institutions, and for the rest of their lives kept money under the proverbial mattress. Hedge fund manager David Einhorn says there is a corporate equivalent today: Apple.
Einhorn released a statement Thursday urging the company to reward shareholders by issuing perpetual preferred shares, which would carry a richer yield than the 2.3% paid by its common shares. (Click here for Abram Brown’s story on Einhorn’s proposal.)
The back story is that Einhorn has had discussions with Apple’s board about ways the company can unlock value for shareholders. His preference: pay shareholders more for holding the stock, and borrow to do so if necessary. From the letter:
Over the past several months, we have had an ongoing dialogue with Apple regarding one option to do so, namely the creation of a new security, a perpetual preferred stock that would be distributed at no cost to Apple’s existing shareholders, and would provide an attractive, sustainable dividend while preserving Apple’s financial resources to pursue its business strategy.
That flies in the face of an Apple proposal to eliminate preferred stock from its charter. The proposal is currently connected to two others in the company’s proxy, and Greenlight is suing the company in the Southern District of New York to force it to unbundle Proposal 2, which reads:
To amend the Company’s Restated Articles of Incorporation to (i) eliminate certain language relating to the term of office of directors in order to facilitate the adoption of majority voting for the election of directors, (ii) eliminate “blank check” preferred stock, (iii) establish a par value for the Company’s common stock of $0.00001 per share and (iv) make other conforming changes as described in more detail in the Proxy Statement;
“Apple has $145 per share of cash on its balance sheet,” Einhorn writes. “As a shareholder this is your money.”
Einhorn, whose hedge fund Greenlight Capital held 1.1 million shares of Apple as of September 30, told CNBC Thursday he thinks Apple can borrow at very low interest rates, which would enable it to pay richer dividends on preferred shares without touching its cash hoard. He noted that other well-capitalized technology firms like Microsoft pay low interest rates and Apple would likely get even more attractive financing. Microsoft's outstanding debt currently ranges in yield from 0.89% for bonds due in September to 5.3% for 30-year paper that matures in February 2041.
The billionaire said that Apple needs to shake its “Depression” mentality about cash management, some of which came from Steve Jobs. Jobs famously took over the company when it was on the brink of bankruptcy, and understandably prioritized having a secure cash cushion at all times.
Now though, many investors believe Apple’s cash pile far exceeds its needs for security, acquisitions and investments in new product development. Value investors like Einhorn are known for wanting companies to return any excess capital to shareholders.
Apple did not respond to a request for comment Thursday morning.
While Einhorn's brand name value may help win support for his push to defeat Apple's proxy proposal, it will be an uphill battle. He owns just 1.2% of Apple's outstanding stock.
Shares of Apple have tumbled since hitting record highs in September, and Einhorn, who once said there is no reason the company couldn’t reach a $1 trillion market cap, appears to be growing frustrated.
With the stock more than 35% off its peak, Einhorn told CNBC Apple is “utterly misvalued.”
The company made more in cash last quarter, than Amazon.com has made in its entire existence, said Einhorn, who was quick to note that he does not have a short position in Amazon.
As for where Apple goes from here, he thinks the stock “will do very well,” and “will do exceptionally well” if Tim Cook and the board take his advice. His proposal comes after a rocky fourth quarter for Greenlight, caused in large part by Apple's tumble.
Apple was up $1.18, or 0.3%, at $455.88 Thursday morning.
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