The term “depression era” isn’t generally the first thing that comes to mind when you think of personal technology giant Apple (NASDAQ:AAPL) — unless, that is, you’re hedge fund whiz David Einhorn.
The Greenlight Capital founder has become the market’s new provocateur, and his latest comments criticizing Apple’s proposal to eliminate the ability to issue preferred stock has caused a big splash in the financial press, among Apple management and Apple shareholders.
In an interview on CNBC, Einhorn explained that the cash-rich technology giant should be looking for ways to distribute that cash and thereby unlock value to shareholders, rather than merely keeping that value on the company’s books.
The way Einhorn put it, Apple has a “depression-era mentality” when it comes to its cash hoard. Building on this description, Einhorn likened the company to how his grandmother treated her finances. Apple is behaving like “someone who’s gone through traumas … they sometimes feel they can never have enough cash,” Einhorn said.
Einhorn went on to say that “Apple is a phenomenal company filled with talented people creating iconic products that consumers around the world love … But Apple has a problem, we think. It has a cash problem.”
Now, when it comes to companies having a lot of cash on their balance sheet, I can think of a lot worse problems to have.
Thanks to the tremendous success of its iPhone, iPad, iPod and Mac products, Apple had a stunning $23 billion in operating cash on its books according to its most recent quarterly report, and $137.1 billion in net cash. That kind of liquidity has prompted many an Apple critic to accuse the company of not spreading the wealth to shareholders.
In an effort to make sure Apple is acting in what he thinks is the best interest of shareholders (which since 2010 includes Greenlight Capital), Einhorn issued a press release urging investors to vote “no” on a proposal from Apple to eliminate the company’s ability to issue preferred stock — special shares with both equity and debt properties that usually have no voting rights but can pay generous dividends. The money quote from the press release:
“We believe Apple must examine all of its options to unlock the growing value of its balance sheet for all shareholders.”
The Greenlight chief also explained that his company has had an ongoing dialogue with Apple management about the creation of a new security that would in essence be 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,” Einhorn said.
Apple apparently had a change of heart, issuing a press release Thursday afternoon saying the company was considering Einhorn’s ideas.
Now, the whole issue of unlocking shareholder value is something that, I suspect, we wouldn’t be talking too much about right now if Apple shares hadn’t fallen on hard times of late. The stock is down about 16% since the beginning of the year, and Apple was unbelievably the worst-performing stock in the S&P 500 in January, with a total return of -14.4%.
The issuance of preferred shares with their own dividend to existing shareholders would serve as a nice little bonus to investors, and that move might make them more apt to stop running for the exits in AAPL.
“For every $50 billion of preferred that they issue it will unlock about $32 a share in Apple. If Apple used about half of their earnings towards this program, we think they would be able to issue approximately $500 billion which would unlock about $320 a share,” Einhorn said on CNBC.
This sounds reasonable from a shareholder point of view, but keep in mind that shareholders and hedge funds weren’t the ones who created one of the greatest, most profitable and most iconic companies in corporate history. Apple management has done that, first with Steve Jobs, and continuing on with Tim Cook.
The stockpiling of cash by Apple is one big reason why it has felt free to experiment with new products, do research and development to create unique technologies, and to make sure its products are the best personal technology items money can buy. For the most part, the company has succeeded in this venture, and until recently, the share price has reflected the soundness of management’s decisions.
The incredible success of AAPL, which has logged a total return of nearly 240% over the past five years vs. a total return of 21.5% for the S&P 500, is one reason why I am reluctant to accept the premise that making sure there’s a lot of cash on your balance sheet as a company is somehow a bad thing.
I also think the “depression-era” dig on Apple is a symptom of wrongheaded thinking. In fact, more companies need to make sure they have plenty of cash on hand. That cash keeps them flexible, and able to make better decisions that are likely to help shareholders in the future.
Apparently, a lot of companies see the wisdom of this cash hoard, and as of March 2012, aggregate corporate cash holdings came in around $1.7 trillion in the U.S.
Certainly, I understand Einhorn’s desire to get the shares back on track, and one way to do so could be by making use of the company’s huge cash position to make the stock more attractive to value players via preferred dividends. Yet I think it’s a mistake to pressure a company into doling out cash when the current formula has worked exceedingly well over the years.
Ultimately, the market will be the decision maker here. If the stock keeps tanking, and if buyers fail to embrace AAPL, then management will have to make changes to their products, and/or to their dividend structure a la Einhorn’s suggestion.
As an individual investor, what you choose to do with your AAPL shares will have an impact on what tack management chooses to take. In doing so, I urge you not to look down on the “depression-era” wisdom of making sure your fiscal house is in order.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities. He does, however, possess a depression-era mind-set when it comes to spending and saving.