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 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.