Yesterday hedge fund hot shot David Einhorn made his case for Apple (AAPL) issuing a preferred stock as a way to distribute the company's massive cash hoard to investors. Einhorn's presentation comes less than a week before Apple shareholders vote on a proposal that would eliminate Apple's ability to issue so-called "blank check" preferred stock. Einhorn has launched a lawsuit against the proposal.
Proponents of Apple's move argue that blank check preferred stock can be used as a defense against takeover bids. By logical extension should Apple's proposal be approved, the company's choices for means by which to "return cash to shareholders" would be limited to increasing the dividend or buying back shares in the open market.
Apple is trying to eliminate an option. Options have value. It thus falls on backers of Apple's plan to demonstrate the efficacy of dividends or buybacks. They can't.
Earlier this month I made the case for a massive hike in payouts from tech companies. The objections to the idea center around the taxes incurred from repatriation of offshore cash. In Apple's case, over $90 billion of its stunning $140 billion in liquid assets are held abroad. Borrowing against those assets would be a way around the tax problem, but it would come at some expense.
Einhorn's plan for a preferred class of stock is, in effect, an argument for a dividend increase that avoids a tax hit for the company. As a bonus it increases the pool of potential Apple investors by creating a way for those seeking high yields to get long shares of the company without forcing all investors to participate.
Two arguments in favor of buybacks are logical non-starters.
The first is that buybacks increase earnings per share and thus the stock price. This assumes the market will pay the same earnings multiple for each dollar earned by a growth company or those with a structure more like that of a utility or REIT. The assumption is demonstrably false.
Earnings "growth" created by buying back shares is worth less than money earned by finding unexploited market opportunities. Lowering the share count and market multiple simultaneously leaves investors right where they started while reducing cash held by the company.
The second notion is that management can exploit opportunities by buying its own stock while it's "cheap." There is no empirical proof that managers or boards are any better at buying their own stock than outsiders — none.
Apple launched a $10 billion buyback on October 1, and the stock is down more than 30% since. Investors would be better served if Apple finds a better way to grow its core business. Having Tim Cook venture into market timing isn't in anyone's best interest.
The real argument for voting down Apple's proposal in favor of the status quo is that buybacks and dividends are "traditional." It's time for shareholders to get over the ways things have always been done and start considering corporate policy and governance by having the flexibility to "think different."
Or shareholders could simply bleat their approval like so many sheep simply because Tim Cook told them to do it.
- Investment & Company Information