What’s with Apple’s cash and Greenlight Capital’s complaining?

Yesterday the Wall Street Journal ran a story about hedge fund titan David Einhorn, and his firm Greenlight Capital’s view that Apple isn’t distributing enough cash to shareholders. Einhorn says Apple is behaving with a “depression-era mentality” according to the story.

Greenlight issued a formal press release outlining its concerns. You can read that release over at Yahoo Finance. The short version of things? Apple has an annual general meeting of shareholders coming up on February 27th and one of the proposals that shareholders will vote on (called “Proposal 2”) will, according to Greenlight, eliminate Apple’s ability to issue preferred stock. Investing pros refer to these as “prefs”, which I’ll do here since it’s way easier to type. Anyway, Greenlight is encouraging shareholders to vote against this proposal.

Instead, Greenlight wants Apple to issue high yielding perpetual prefs. The “perpetual” part of the name just means that the stock has no maturity date. Prefs are often considered to be a hybrid investment because while they are technically a form of stock (equity), they often have no voting rights and often have a fixed dividend (just like a bond coupon) and they usually have a maturity date, which means they behave more like bonds (debt). Perpetual prefs never mature, so they just collect dividends forever.

Greenlight says that prefs have favorable tax treatment. And since I’m no tax expert I did some digging into this. I can’t figure out why Einhorn’s crew is saying this. It’s true that dividends get better tax treatment than bond coupon payments, but I found nothing to show why pref share dividends are better than common share dividends.

Apple PR (opens in new tab) also issued a statement debunking Greenlight’s claims. Specifically, Greenlight’s press release says that Apple is trying to pass a proposal that eliminates the ability to issue prefs. That’s not true. According to Apple, they’re just proposing to eliminate the board of director’s ability to issue such instruments without shareholder approval. Apple says it can still issue prefs in the future, but they’ll need shareholder approval.

In my books that’s a good thing. That’s a shareholder-friendly move.

Finally, I must confess I don’t see the difference between Apple raising its common share dividend versus issuing new prefs to existing shareholders. In the end they are all just dividend payments, who why complicate the capital structure by issuing prefs at all? Keep it simple, stupid.

Former sell side analyst, out-of-box thinker, consultant, entrepreneur. Interests: Wife & kids, tech, NLP, fitness, travel, investing, 4HWW.

  • On a side note any CEO worth his pay is hoarding cash reserves. When the decision was made to re-inflate the economy through "stimulus", bailouts and public sector job growth rather than let it rebuild on solid footing the die was already cast. This bubble will pop; the only question is when.
  • Spot on.
  • Agreed
  • When the depression hits, running the company with a 'depression-era mentality' might just be seen as a good thing. Of course, this isn't as good for the short-term, take the money and run, Einhorn types.
  • Those cash piles grew way beyond what we could call a safety buffer. From a financial perspective keeping too much cash is equally harmful as lack of liquidity. It may mean lower return on equity, high alternative costs and lost growth opportunities. It seems like the company doesn't really have any particular idea what to do with those resources. If that's the case, they probably should pay out a reasonably higher dividend and let shareholders manage their cash assets on their own.