The key concern here is whether preferred stock or equity dividends should be used to distribute the excess cash. The simplicity of dividends is that the program can be suspended at will. If management or the board feels that the market scenario or company’s recent performance warrants that the dividend program be suspended, it can easily be done. However, the same cannot be said about preferred stocks. Although such a move would not be impossible, the cost of suspending the dividend program via preferred stocks will be very high.
Is Apple correct in being conservative?
Interestingly, Apple’s stock has been consistently falling since September 2012. It was trading at around $700 in September, while it is now trading at $ 450. Thus, the company needs to come up with another extremely successful product soon, to reinstill confidence in its shareholders. The company’s latest offering, the iPhone 5, was criticized by the market for lacking the innovation seen in its earlier products. Apple may need to invest further in R&D to innovate within its current line of products and/or come up with new ones.
In addition, Apple has been locked in a fight with Samsung, backed by Google Inc (NASDAQ: GOOG)’s Android software platform, over global market share in the smart phone race. Samsung’s S3 phone’s sales have been consistently going up, surpassing the iPhone 5 globally. Apple has also been locked in numerous lawsuits with Samsung regarding the design of smartphones and tablet computers. Thus, it’s safe to say that Apple does carry a considerably huge contingent liability in its books.
Apple is also facing considerable competition from the launch of BlackBerry’s new Z10 phone. On Monday, one Canadian retailer said that since Feb. 5, the new phone had sold more than the iPhone 5. Although this may not necessarily be the long term trend, Apple is sure to feel pressure on its own sales.
Give Apple time to come back
Apple shares rose 1.1% on Friday after the court verdict, indicating that some investors may be keen to get excess cash out of the company. However, these investors are definitely not going to be able to earn the sort of returns that investors in 2008 and 2009 would have. It is crucial to Apple’s long-term prospects, and hence also the interest of share holders, that the management of the company is given the flexibility to issue and stop the dividends as needed. As an investor, I would be looking forward keenly for the launch of the company’s next product, before asking the management to expedite its cash distribution.
The article Einhorn vs. Apple: A Battle Won, But What About the War? originally appeared on Fool.com and is written by Sujata Dutta.
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