Greenlight Capital founder David Einhorn said his proposed capital allocation strategy for Apple is a “a win-win for everyone,” and in a Thursday afternoon presentation to investors entitled “iPrefs, Unlocking Value,” the longtime Apple bull explained why.
“In contrast with the rest of the business, where innovation is the norm, Apple’s attitude toward its cash is quite conservative,” he said. “We have a solution that allows it to have its cake and eat it too.”
That solution? iPrefs, a perpetual preferred stock that Einhorn argues should be Apple’s next “product.” So what are iPrefs — aside from being “the product Apple doesn’t know it needs.”
Essentially, they’re shares that pay dividends forever.
“An iPref has a base value of $50 and pays a dividend of $2 per year,” Einhorn explained. “Apple can redeem them for face value, shareholders should expect to receive 50 cents per quarter, every quarter, forever.” And for Apple, he said, they won’t cost any of its existing cash stockpile. “iPrefs don’t interfere with whatever Apple’s business plan is. … They are a form of equity, not debt.”
But why does a company like Apple need such a thing? Most other publicly traded companies don’t seem to. Well, Apple isn’t like most other companies.
“Most companies are appropriately capitalized and consequently trade at market valuations commensurate with their intrinsic value,” Einhorn said. “Apple is different, though. … It’s not appropriately capitalized. And it’s not minimizing its cost of capital. This is one reason why we believe Apple’s stock trades at a valuation well below its intrinsic value.”
If iPrefs sound like a bunch of financial engineering, they’re not — according to Einhorn, anyway. “This is not a complicated idea, it’s just unfamiliar,” he said. “[With iPrefs], Apple can keep it’s cake, and the shareholders get to eat it too.”
Apple just announced that it is in talks with Greenlight Capital about finding a way to distribute cash to shareholders. Apple shares rose by $13.55, or nearly 3 percent, on the news.
In a statement issued a few minutes ago, Apple said it is in “active discussions about returning additional cash to shareholders,” and said it would “thoroughly evaluate Greenlight Capital’s current proposal to issue some form of preferred stock.”
The talks come as Greenlight Capital has sued Apple over a plan its CEO David Einhorn says could generate as much as $32 a share through the issuance of preferred stock.
Einhorn launched a public campaign today alongside the lawsuit, urging Apple shareholders to vote against a proposal in Apple’s proxy that he argued would eliminate preferred stock from the corporate charter.
In its statement, Apple disputes Einhorn’s view of the proposal, the second going before shareholders on its latest proxy statement: “As part of our review, we will thoroughly evaluate Greenlight Capital’s current proposal to issue some form of preferred stock. We welcome Greenlight’s views and the views of all of our shareholders.”
Apple’s hoard of cash — it counts both cash and short- and long-term investments in its cash position — has grown substantially in recent years to north of $137 billion as of its most recent quarter ended in December. The cash, easily the largest among tech companies, and among the highest cash positions of all corporations in the world, comes from Apple’s considerable generation of free cash flow: $23 billion went straight into its coffers last quarter alone, and it hasn’t had debt for years.
Last year, Apple initiated a quarterly dividend payment to shareholders of $2.65 a share, in partial reaction to shareholder outcry.
Here’s the full statement from Apple:
Statement by Apple
By early last year, Apple’s cash balance had built to a point beyond what we needed to run our business and maintain flexibility to take advantage of strategic opportunities, so we announced a plan to return $45 billion to shareholders over three years. As of next week we will have executed $10 billion of that plan.
We find ourselves in the fortunate position of continuing to generate large amounts of cash, including $23 billion in cash flow from operations in the last quarter alone.
Apple’s management team and Board of Directors have been in active discussions about returning additional cash to shareholders. As part of our review, we will thoroughly evaluate Greenlight Capital’s current proposal to issue some form of preferred stock. We welcome Greenlight’s views and the views of all of our shareholders.
As a part of our efforts to further enhance corporate governance and serve our shareholders’ best interests, Proposal #2 in our proxy includes some recommended changes to our articles of incorporation. These changes were recommended independently of Greenlight’s proposal and would not preclude Apple from adopting their concept. Contrary to Greenlight’s statements, adoption of Proposal #2 would not prevent the issuance of preferred stock.
Currently, Apple’s articles of incorporation provide for the issuance of “blank check” preferred stock by the Board of Directors without shareholder approval. If Proposal #2 is adopted, our shareholders would have the right to approve the issuance of preferred stock. As such, Proposal #2 has the support of many of our shareholders.
We remain committed to having an ongoing dialogue with our shareholders to get perspectives around return of capital and driving shareholder value.