On February 7, David Einhorn, the famous hedgie from Greenlight Capital, published a pressing letter to Apple Inc. (NASDAQ:AAPL) shareholders. In this letter, he urged shareholders to resist the company’s attempt to eliminate preferred stock from its charter. According to Einhorn, an Apple shareholder since 2010, the iconic company could unlock tremendous value from its balance sheet by issuing high yielding preferred stock to its current shareholders.
The underlying rational
The basic rational underlying this interesting initiative is the ultra-conservative balance sheet of Apple. As of this writing, the company has a cash mountain in the amount of $137 billion (and growing..), or $145 per share. At a share price of $470, it means that 30% of a share’s price is pure cash. In other words, that’s idle money sitting in the bank earning measly rate of interest instead of being deployed efficiently by management. He urges that although the company commenced to pay a dividend in 2012, it’s by far too little and too late. Much more could be done in the capital allocation front. The safest place for the company’s excessive cash is the shareholder’s pocket.
Cash is king: Not only for Apple
Accumulating mountains of cash on the balance sheet has been a favorite practice lately. Many cash- gushing companies, fearful of a 2008 replay, simply prefer to stay on the safe side with their mountains of cash. Below is a list of mega tech companies with growing loads of cash only waiting to be returned to the hands of shareholders:
- Microsoft Corporation (NASDAQ:MSFT) is the ultimate leader of this cash collecting practice. Microsoft currently maintains $68 billion on its balance sheet, or $8.13 per share. Similarly to Apple, 30% of the share price of Mr. Softy consists of pure idle cash. Differently from Apple, Microsoft is a mature company with a virtual monopoly in its field of server and operating systems. Apple’s products, as iconic as they may be, could be duplicated, outdated or easily fall out of fashion with their users. In addition, Microsoft has raised its annual dividend at an impressive rate of 15% per annum, currently at 3.5%. The same could hardly be said for Apple.
- Cisco Systems, Inc. (NASDAQ:CSCO), the provider of plumbing services for the Internet is another cash-gushing monster. Cisco currently has $45 billion of cash on its balance sheet, or $8.5 cash per share, a whopping 40% of its share price. The company grows its earnings at an annual clip of 17% with a gross operating margin of 23% which explains perhaps why it is able to accumulate so much cash, so fast. With a relatively modest dividend yield of 2.5%, Cisco’s annual dividend definitely has some room to grow. It should.