Cash Windfall for Apple Inc. (AAPL) Shareholders?

LONDON — With some luck, Apple Inc. (NASDAQ:AAPL) shareholders could be in for a cash windfall.

Activist hedge fund Greenlight Capital is taking legal action over the company’s massive cash pile. It piles pressure on the company to return dormant cash to shareholders. Apple Inc. (NASDAQ:AAPL) could boost its current share-buyback program, increase its dividend, or give away preferred stock to ordinary shareholders.

A nice problem to have
Apple’s is a nice problem to have: It’s generating cash faster than it can use it. So its cash mountain is growing: $137 billion, or $145 per share at the last count. That’s over a quarter of the current share price.

Apple Inc. (NASDAQ:AAPL)’s growth has slowed from its former days, and it has become such a big cash machine that it just doesn’t have enough investment projects to spend its money on. Goldman Sachs Group, Inc. (NYSE:GS)‘ analysts reckon it generates a free cash flow yield of around 10%. That’s what’s available to pay dividends. Investors receive only a modest 2% yield, and the rest adds to the pile of spare cash.

Apple Inc. (NASDAQ:AAPL) has been squirreling much of this money away in overseas tax havens. About 70% of the funds are held offshore and would incur tax charges if taken back into the United States. At some point, it would make distributions expensive.

Clever wheeze
That’s where Greenlight’s clever wheeze comes in. Last year, it suggested that Apple Inc. (NASDAQ:AAPL) should distribute $50 billion of perpetual preferred shares to existing shareholders, at no cost. The preferred stock would yield 4% a year, in line with Microsoft Corporation (NASDAQ:MSFT)‘s 30-year debt, and be separately tradable.

It wouldn’t involve any distribution of cash: In effect it would be leveraging up Apple’s strong balance sheet. It’s a bit of financial wizardry, but not one that would put the company in any danger, with the preferred stock coupon costing just $2 billion a year.

Greenhill thinks the company could distribute several hundred billions of dollars of such stock, worth hundreds of dollars per share.

Or not so clever
The financial trick is that the perpetual stock, if it were to yield 4%, would effectively be valued at a price-to-earnings multiple of 25. That works only if investors believe Apple will be around for eternity (more or less, depending on your choice of discount rate), and interest rates won’t rise too much in that time.

Apple’s directors rejected the proposal and at this year’s annual meeting plan to abolish preferred stock from the company’s charter. Greenlight’s lawsuit simply aims to stop the company from bundling this issue up with a couple of other resolutions.