There’s lots of chatter about David Einhorn suing Apple over their capital allocation policies. As I’ve written fairly recently, I think Apple is a terrible capital allocator. I’m not the only person who thinks so.
Here’s what Einhorn wants to do to unlock shareholder value:
- Apple should pay out a preferred stock dividend to shareholders.
- The preferred stock would yield 4% in perpetuity (forever.)
- Based on Einhorn’s numbers, he thinks every $50 billion of preferreds would unlock $32 per share in Apple. Running the hp12c on that one says…basically, he expects the preferreds to trade at a yield of 6.58%.
Ultimately, Einhorn thinks Apple should dedicate half of their earnings to paying for the newly-issued preferred stock. The result would be $500 in face value of Apple preferred stock yielding 4%. In market value, Einhorn thinks the preferreds will be worth $320 per share (again going back to the fact he thinks these will sell at a yield of 6.58%). Alternatively, Apple shareholders can enjoy the $20 in annual preferred dividends paid out each year.
Why this has legs
Einhorn’s proposal does three things:
- It assumes that the market has discounted significantly the value of Apple’s cash because investors have no idea when it will be returned. (FWIW, I completely agree with this assumption.)
- It plays on the fact that yields are ridiculously low and the appetite for high quality bond and preferred stock issues is exorbitant.
- It benefits people who want a higher annual dividend (just hold the preferred stock, in that case) and the people who want a one-time special dividend (just sell the preferred stock once it’s issued to you).
Basically, Einhorn’s hoping that he can encourage Apple to engage in a program that will create money from thin air. The hope is that the market value of the preferred stock plus the market value of the common stock will be greater than the current market value of the common without preferreds.
If Apple shareholders see a plan for the return of the cash on the balance sheet, they should be more eager to pay for that cash. Additionally, by “selling” the cash in a preferred, Einhorn hopes to multiply the benefit by tapping investors who are CRAVING yield and willing to pay a premium for it. Finally, Einhorn’s plan allows for Apple to slowly remove cash from the balance sheet, allowing the company a cushion while still having a plan to return cash to shareholders.
All in all, I completely dig the plan. I think it’s a little overcomplicated – repurchases/dividends work, too – but anything that gets people talking about returning cash to shareholders is favorable for all.