David Einhorn Has A Point: Show Us The Money, Apple Inc. (AAPL)

David Einhorn, famous hedge fund manager at Greenlight Capital, recently made waves when he publicly took Apple Inc. (NASDAQ:AAPL) to task for guarding its purse strings too tightly.  Einhorn suggested that Apple unlock value for shareholders by issuing a boatload of preferred shares, paying 4% in perpetuity.  While I won’t say that Einhorn’s specific strategy is my favorite idea, I can definitely say that he has a point.  Apple Inc. (NASDAQ:AAPL)’s cash hoard is too huge, and it isn’t doing common stockholders any good rotting on the balance sheet.

Other Big-Cap Tech as a Template

There’s currently a strange stigma attached to large-cap technology stocks that return cash to shareholders.  Many observers deride the decision, saying that a technology company paying dividends is an admission that the company’s growth days are over.  To illustrate this, many point to the fortunes of fellow tech firms Microsoft Corporation (NASDAQ:MSFT) and Intel Corporation (NASDAQ:INTC), which have painfully transformed from growth stocks to value stocks as a result of their decisions to return cash to shareholders via a dividend.

Financial pundits love to call Microsoft “dead money.”  In 2000, the stock reached almost $60 per share.  After the tech bubble burst, the stock fell to less than $30, and indeed has traded sideways ever since.  The fundamentals, meanwhile, painted a different picture.

In fiscal 2001, Microsoft booked diluted earnings per share of $1.32 on revenues of $25 billion.  Investors buying at $60 paid 45 times those earnings.  The fact is, over the next decade, Microsoft grew its sales and profits at compound annual growth rates of 10.7% and 7.4%, respectively–not exactly fitting the description of a “dead” company.

Ditto for Intel.  The stock traded north of $73 per share in the fall of 2000 before falling to the low $20s — exactly where it stands today.  Even using Intel’s most profitable year between 1991 and 2003, investors were paying more than 48 times those earnings at a price of $73.  The company, meanwhile, grew its revenues by more than 7% annually during the 10-year period of 2001-2011.

Microsoft and Intel didn’t become value stocks because they decided to pay dividends; they decided to pay dividends because they became value stocks.  Knowing that their shares would probably never be able to provide the growth rates that the market wanted, Microsoft and Intel decided to provide shareholders a return by paying big dividends.