- Large buyback would deplete cash and require paying high taxes on repatriated cash
- Larger dividend wouldn't increase share value as much......
- If Einhorn is correct and the iPrefs fetch $50 and a 4% yield, they are essentially borrowing $47B at 4% interest from iPref buyers to pay a dividend to investors who sell their iPrefs. Except there is no chance of default, since iPrefs are equity not debt. ......
(i) A buyback of $30 - 40B or so would not require repatriation of funds at all. That amount takes into account what will come in during the next year domestically, and subtracts Apple's already committed dividend and buyback as well as net reinvestment needs for the rest of the fiscal year.
(ii) There is absolutely nothing in Einhorn's analysis that shows a larger dividend wouldn't increase share value. It is pure surmise on his part. Period. (If there is actual analysis there, please share it with us).
(iii) The issuance of Prefs changes nothing at all about the Apple's ability to generate free cash flow, which, in turn, comes from the real things it is doing as a business, i.e., with its assets. Einhorn's proposal is merely financial engineering on the liabilities side of the balance sheet. It may (or may not) have some second order value impact, at best. Unless Apple does something to continue to dramatically grow its cash flow by producing and selling more of the existing stuff (e.g., China Mobile, India, Brazil....) and creating new stuff (e.g., iTV, iCar, iHealth, iEducation, India, Brazil,......) it cannot grow its value for the future in a sustained way.
Btw, please ask yourself: If this was all so simple and obvious to do, why aren't dozens of companies who are flush with cash doing this in droves? Are they all just collectively stupid, and/or is Einhorn more smart than all of them put together?
One final point: the only large publicly traded companies that issue preferreds are some of the most staid, old businesses in the US, e.g., utilities. Is that the pool you see Apple belonging to?
(i) A buyback of $30 - 40B or so would not require repatriation of funds at all. That amount takes into account what will come in during the next year domestically, and subtracts Apple's already committed dividend and buyback as well as net reinvestment needs for the rest of the fiscal year.
(ii) There is absolutely nothing in Einhorn's analysis that shows a larger dividend wouldn't increase share value. It is pure surmise on his part. Period. (If there is actual analysis there, please share it with us).
(iii) The issuance of Prefs changes nothing at all about the Apple's ability to generate free cash flow, which, in turn, comes from the real things it is doing as a business, i.e., with its assets. Einhorn's proposal is merely financial engineering on the liabilities side of the balance sheet. It may (or may not) have some second order value impact, at best. Unless Apple does something to continue to dramatically grow its cash flow by producing and selling more of the existing stuff (e.g., China Mobile, India, Brazil....) and creating new stuff (e.g., iTV, iCar, iHealth, iEducation, India, Brazil,......) it cannot grow its value for the future in a sustained way.
Btw, please ask yourself: If this was all so simple and obvious to do, why aren't dozens of companies who are flush with cash doing this in droves? Are they all just collectively stupid, and/or is Einhorn more smart than all of them put together?
One final point: the only large publicly traded companies that issue preferreds are some of the most staid, old businesses in the US, e.g., utilities. Is that the pool you see Apple belonging to?
PS: Fixed a couple of typos.
Thanks for the thoughtful reply anant. I read the link to Aswath Damodaran's commentary, and it is the strongest case I have heard made against Einhorn. I do agree with much of what he says. However, on some points I am less convinced. And he does seem to believe that it is possible that Einhorn's proposal could increase the price if not "value". That is, common + pref would be valued higher than common without prefs.
On the issue of whether it increases value, I believe it does, or at least the value to shareholders. Is a cow not just a bunch of steaks, hide, organs, etc? So they are of equal value right? Or is the sum of its parts more valuable than the whole, because many people have no use for a cow, but are interested in its different parts such as a steak. In this case, separating the parts "unlocks value". In the same way, by separating the growth vehicle (common) from the income vehicle (prefs), the total value to each owner may be higher than the original value. If this increases demand from previously uninterested parties, then that may be supportive to price as well.
This is what Aswath says: "If investors are discounting cash for one or both of these reasons, the preferred stock may serve to increase the price because it commits Apple to returning the cash (in the form of preferred dividends) in perpetuity. "
The more important question to me than which companies typically issue preferred stock, is why should Apple do it? And who would want to buy the preferred shares, at what interest rate, and how much? $235B worth (the face value of 5 iPrefs per share) at 4% or less? Could they sell bonds instead and then do a large one-time divi? If so, how much and at what rate? Is issuing preferred shares preferable?
Aswath pointed out alternatives such as giving a bond to shareholders, but noted the disadvantages of doing this instead, such as potential for default and unfavorable tax treatment for current investors. I would vote no on that.
It's true Apple could do a large buyback, but that would eat basically all US cash and would be a smaller commitment than Einhorn's plan. I suppose they could lay out a plan for future buybacks, which might help comfort investors concerns as well. This would be fine if Apple is not planning to use any of that domestic cash for acquisitions etc. And I'm not sure it would be better than or as good as the prefs.
A larger dividend would be ok, but I see Einhorn's logic on why it may be less bang for the buck because the divis would likely remain under appreciated. Of course this is speculation, but he did give some examples of other companies with high divi rates, so it is certainly a reasonable possibility. I think I'd prefer buybacks anyway, at these prices.
I see Apple as a unique company (huge market cap, huge profit growth, high margins) with a unique problem on its hands (huge cash balance). I'm sure if Einhorn's proposal is the best, Apple will realize it, so I'm not concerned. In most cases I cringe when I hear the words finance and innovation together, but I haven't yet figured out why in this case it is a bad thing.
Anant, you and Aswath made a case for why other alternatives are valid and that Einhorn's claims might be overstated. But I didn't see any reasons why it is a horrible idea or bad for shareholders, as many here seem to believe.
Thanks for the thoughtful reply anant. I read the link to Aswath Damodaran's commentary, and it is the strongest case I have heard made against Einhorn. I do agree with much of what he says. However, on some points I am less convinced. And he does seem to believe that it is possible that Einhorn's proposal could increase the price if not "value". That is, common + pref would be valued higher than common without prefs..
That's not what he said. If you read more carefully, he said that it's possible that issuing preferred shares might increase the price - but no more than simply increasing the dividend on the common shares. When you consider tax consequences, share buy-backs may be the best of all.
As a shareholder, you are entitled to about 1 one billionth of Apple - everything it owns, including cash, profits, IP, and so on - for each share that you hold. Distributing cash doesn't do anything to the true value of your holdings. You simply transferred it from one pocket to another (except that you have to pay taxes on the transfer, so you're actually worse off).
Right, the same as $450 in the bank earning .001% interest in perpetuity is the same as 1 share of AAPL right? Returning that cash to shareholders is the same as letting it waste away earning .001% interest. No chance they would do anything more productive with it. Mind you, I'm not saying its not worth it for Apple to keep the cash around if it has plans to use it, but it does come at a cost. Opportunity cost, plus value lost to inflation.
That's not what he said. If you read more carefully, he said that it's possible that issuing preferred shares might increase the price - but no more than simply increasing the dividend on the common shares. When you consider tax consequences, share buy-backs may be the best of all.
The article has been moved from the location given above. Here it is:
Basically, it's all the things I've been saying on this topic all along.
I didn't say he did. Just that it could increase price from current, which I would describe as unlocking value. But that's just semantics. I find Einhorn's reasoning on why it could unlock more value than divis to be more compelling than AD's rebuttal, but really no way to know for sure.
When I consider tax consequences, it looks like the best option might be the preferred shares, especially for those who sell them, if indeed it just results in an adjustment to the cost basis of the common shares. That is, basically a non-event, unless I am mistaken which is possible.
Wrong. It doesn't really add anything. Apple can increase dividends to whatever level they want even without Einhorn's proposal. Heck, Apple can even borrow money to pay dividends if they wish without issuing preferred stock (even though that's a ridiculous idea). It doesn't free up one penny of value.
Einhorn's proposal adds nothing - except a way to take advantage of uninformed investors.
Please explain, how is this taking advantage of uninformed investors? Thanks.
Right, the same as $450 in the bank earning .001% interest in perpetuity is the same as 1 share of AAPL right? Returning that cash to shareholders is the same as letting it waste away earning .001% interest. No chance they would do anything more productive with it. Mind you, I'm not saying its not worth it for Apple to keep the cash around if it has plans to use it, but it does come at a cost. Opportunity cost, plus value lost to inflation.
You're obviously confused.
First, no one is talking about 0.001% of anything. Since you're clearly imagining things, it's hard to figure out just what you're trying to say - you clearly don't understand business finances.
Second, you've completely ignored the impact of value on price. In a perfect market, a $1 drop in cash would lead to a $1 drop in share price, so distributing dividends would have exactly zero impact on share price.
Third, Apple obviously thinks they have a reason to keep some cash around. They've done very well by their shareholders for the past decade. Why is it that so many people who have no clue how to run a business (much less a successful business like AAPL) insist on telling them how to do it.
Fourth, you're ignoring tax consequences. If the cash remains in the corporation, you get the money when you sell - and it is therefore treated as capital gains. If they issue a dividend, it is taxed at income rates. While there are temporary rules which minimize the difference, historically, income has been taxed at roughly twice the rate of capital gains.
Fifth, even if you feel that a larger dividend is needed, simply increasing the dividend for common shares is more efficient and less costly. There's no reason for preferred shares (which is why very few manufacturing companies use them).
Sixth, because of tax consequences and the low share price (7 times cash-adjusted earnings), the most effective way to use the money is to increase the share buybacks.
Please explain, how is this taking advantage of uninformed investors? Thanks.
Anything that makes stock ownership more confusing and complex benefits institutional holdings more than individuals. Unless you think that the average Mom and Pop investor is as financially knowledgable as a massive brokerage, it puts them at a disadvantage.
Now, individual investors will always be at something of a disadvantage, but that doesn't justify making it worse.
It serves no useful purpose. If Apple wants to give more money back to the shareholders, they can do so simply by increasing the dividend. No need for preferred shares.
Right on. Another class of shares just messes up Apple's stock.
Apple could simply issue a special dividend after each years results.
Apple could simply issue a special dividend after each years results.
Not a bad idea, but then, a share repurchase is far better: At least, they can get their own shares to keep as treasury stock in return, to use for future employee option exercise (and thus mitigate dilution).
First, no one is talking about 0.001% of anything. Since you're clearly imagining things, it's hard to figure out just what you're trying to say - you clearly don't understand business finances.
Second, you've completely ignored the impact of value on price. In a perfect market, a $1 drop in cash would lead to a $1 drop in share price, so distributing dividends would have exactly zero impact on share price.
Third, Apple obviously thinks they have a reason to keep some cash around. They've done very well by their shareholders for the past decade. Why is it that so many people who have no clue how to run a business (much less a successful business like AAPL) insist on telling them how to do it.
Fourth, you're ignoring tax consequences. If the cash remains in the corporation, you get the money when you sell - and it is therefore treated as capital gains. If they issue a dividend, it is taxed at income rates. While there are temporary rules which minimize the difference, historically, income has been taxed at roughly twice the rate of capital gains.
Fifth, even if you feel that a larger dividend is needed, simply increasing the dividend for common shares is more efficient and less costly. There's no reason for preferred shares (which is why very few manufacturing companies use them).
Sixth, because of tax consequences and the low share price (7 times cash-adjusted earnings), the most effective way to use the money is to increase the share buybacks.
1. You are confused. I was speaking about the interest cash earns. .001% was hyperbole to indicate "piss poor returns".
2. We don't have a perfect market obviously. I'm not ignoring anything.
3. I clearly indicated respect for Apple's ability to make good decisions.
4. You have ignored everything I said about tax consequences. Are you even reading my comments?
5. See previous comments
6. See previous comments
I am only interested in honest exchange of ideas. You clearly just want to argue and be right, even if it means ignoring what I have said or mischaracterizing it.
Anything that makes stock ownership more confusing and complex benefits institutional holdings more than individuals. Unless you think that the average Mom and Pop investor is as financially knowledgable as a massive brokerage, it puts them at a disadvantage.
Now, individual investors will always be at something of a disadvantage, but that doesn't justify making it worse.
I agree with this in general. In this case, it could be worth it, but perhaps not. I was more considering the current shareholders, who would have a simple decision to hold or sell. But it does make things more complicated. The thing is, simplicity has not worked out so well either, so not sure this could be any worse.
I agree with this in general. In this case, it could be worth it, but perhaps not. I was more considering the current shareholders, who would have a simple decision to hold or sell. But it does make things more complicated. The thing is, simplicity has not worked out so well either, so not sure this could be any worse.
Forget about what shareholders could get from iPrefs and consider if its going to be good for Apple.
What comes out of this if it is adopted -
another market Wall St can trade in.
another indicator analysts can comment on.
Are any of those going help or hinder Apple going forward ?
Forget about what shareholders could get from iPrefs and consider if its going to be good for Apple.
What comes out of this if it is adopted -
another market Wall St can trade in.
another indicator analysts can comment on.
Are any of those going help or hinder Apple going forward ?
I'm not sure how this affects Apple at all, except less obscene cash reserves. Not sure what affect it has on employee stock options, which I would imagine would be a factor in Apple's decision on what to do with the cash. Do all choices (divi, buyback, preferreds) benefit option holders equally? And worst case, if Apple doesn't like the effects, it can always buy back the preferreds, right?
If you meant the effect on AAPL, looks like more of the same to me. However, I think it helps AAPL to make a firm commitment to return the cash.
Your criticism is representative of most being made - heavy on fear and innuendo, and light on details of how it will actually cause bad effects. I'm not saying none of them have merit, just that when I try to identify specific effects, the arguments appear weak. I am certainly not a financial guru, but I would expect someone who is would be able to make a solid case, and I have not seen it yet.
Again, I'm sure Apple will make the right decision, so I'm not worried about it at all. I just don't get the vitriole towards Einhorn. Yes, he sued Apple, but he also showed great care in crafting a proposal that gives them the flexibility they have been trying to preserve. Suing Apple was not a great move to build goodwill, but I wonder if there is more to the story that we aren't aware of.
The only thing I fear for Apple is more of the same nonsense we have seen for the past year.
Innuendo ? Well, if you mean that there is no certain outcome from what Einhorn has suggested then innuendo it is in your book. I personally think there's no need - although it somewhat creative.
Does it help Apples operations going forward (sorry, I did mean Apple above not AAPL shares) then I say, No. Not in the long term. IMO only of course.
Your criticism is representative of most being made - heavy on fear and innuendo, and light on details of how it will actually cause bad effects. I'm not saying none of them have merit, just that when I try to identify specific effects, the arguments appear weak.
I am less and less sure of who's throwing around innuendo, after reading the sum total of your posts.
The reason I say that is, Einhorn's analysis is quite weak too, with few specifics, no numbers, lots of surmises and handwaving -- and yet, you seem quite comfortable with his assertions.
The only halfway credible point you've brought up on his behalf is that you say he thinks that somehow, splitting the 'growth' (share price gain) and 'value' (dividends into a separate claim) part will create 'value.' Neither you (nor he) has provided a shred of empirical evidence to back that up, except for an analogy to cuts of meat. Financial instruments that can be easily dissected/replicated in the market are very different from cuts of meat. Any large shareholder who wants to take the stock and securitize it into two separate claims reflecting growth and dividend components could easily do so. Heck, Einhorn could do this himself, if he truly is willing to put him money where his mouth is!
Nor have you, when requested, provided any backup to your paen to Einhorn. I asked you: "There is absolutely nothing in Einhorn's analysis that shows a larger dividend wouldn't increase share value. ....If there is actual analysis there, please share it with us." You haven't. Then I asked you, "If this was all so simple and obvious to do, why aren't dozens of companies who are flush with cash doing this in droves?" You didn't respond to that. Finally, I asked you, "The only large publicly traded companies that issue preferreds are some of the most staid, old businesses in the US, e.g., utilities. Is that the pool you see Apple belonging to?" You ignored that question too.
I agree with this in general. In this case, it could be worth it, but perhaps not. I was more considering the current shareholders, who would have a simple decision to hold or sell. But it does make things more complicated. The thing is, simplicity has not worked out so well either, so not sure this could be any worse.
That ignores the simple solution which accomplishes the same thing. If Apple wants to distribute more cash, they can do so simply by increasing the dividend without adding the complexity of preferred shares. So one can't use "greater dividend would increase share value" as an argument in favor of the preferred shares since you can get the same result without using preferred shares.
(In fact, buying back shares would probably be even better due to tax consequences, but that's a separate matter).
I am less and less sure of who's throwing around innuendo, after reading the sum total of your posts.
The reason I say that is, Einhorn's analysis is quite weak too, with few specifics, no numbers, lots of surmises and handwaving -- and yet, you seem quite comfortable with his assertions.
The only halfway credible point you've brought up on his behalf is that you say he thinks that somehow, splitting the 'growth' (share price gain) and 'value' (dividends into a separate claim) part will create 'value.' Neither you (nor he) has provided a shred of empirical evidence to back that up, except for an analogy to cuts of meat. Financial instruments that can be easily dissected/replicated in the market are very different from cuts of meat. Any large shareholder who wants to take the stock and securitize it into two separate claims reflecting growth and dividend components could easily do so. Heck, Einhorn could do this himself, if he truly is willing to put him money where his mouth is!
Nor have you, when requested, provided any backup to your paen to Einhorn. I asked you: "There is absolutely nothing in Einhorn's analysis that shows a larger dividend wouldn't increase share value. ....If there is actual analysis there, please share it with us." You haven't. Then I asked you, "If this was all so simple and obvious to do, why aren't dozens of companies who are flush with cash doing this in droves?" You didn't respond to that. Finally, I asked you, "The only large publicly traded companies that issue preferreds are some of the most staid, old businesses in the US, e.g., utilities. Is that the pool you see Apple belonging to?" You ignored that question too.
Disappointing.
Anant, I appreciate your perspective and that you seem genuinely interested in honest discussion. I respect your right to disagree, but think you may be misunderstanding what I have said.
As far as innuendo, I would say Einhorn's arguments are more like speculation, as is any forecast of the effect of the various options on Apple's share price. I have no problem with that, except when someone states a forecast as a fact. I have tried to be clear in my language that it is speculation, and in fact used that very word multiple times I believe.
The innuendo I referred to included a couple of your questions you referred to, as well as others. Why aren't other companies doing this? I don't know, nor do I feel it is a necessary question to answer. It would certainly be helpful to have an answer though, if that same reason applied to Apple as well. Can you tell me why Apple should not do it? If you know, why not just say it instead of asking a question implying an answer? The same applies to your question regarding whether Apple fits the profile of companies who do issue preferreds. You imply that preferreds are only appropriate for that profile of company, but you didn't make any case to support that. Please explain why it is not appropriate for Apple, at least. I did address these questions when I said I believe Apple is a unique company with a unique problem, which is a reasonable hypothesis. Clearly Wall Street believes it has a fundamental difference, to give it such a low PE despite growth prospects in line with similar companies which are valued much higher on a PE basis.
It is apparent you haven't looked at Einhorn's charts, and I honestly don't know why you would waste time arguing against something you don't even know the details on. Asking me to fill in the blanks for you is not productive or considerate. I realize I am asking the same of you, but only because I have done as much research as I was able to already. I took the time to at least hear the other side (Einhorn, at that point), and found his plan to seem reasonable. But being skeptical, I am seeking input from others in hopes that if there is a downside to his plan, they might enlighten me.
For instance, neither Einhorn nor I said a larger dividend wouldn't raise the share price, just that it likely would be less bang for their buck. In fact he laid out a scenario of doubling the dividend, and the various prices implied at different yields. If Apple were priced according to a dividend yield of 4%, for instance, it would trade at $530. At 4.5%, it would be $471. So he at least does have concrete numbers for much of his arguments, and explanations for why he believes a certain outcome is likely, if not certain. Of course there is speculation involved, out of necessity. I have not and will not criticize anyone who assesses the probability of outcomes differently.
I think I supported my claims of unlocking value as well as I am able, and I think they are very reasonable. We will have to agree to disagree here. The only thing more I could add is to reiterate, the low interest rates could possibly result in a lower yield on the preferred being acceptable than in a different environment, so it might fetch a higher value than normal. But, the common might need to adjust less than the preferred value, basically because it has just secured cheap financing. This is my own speculation, not Einhorn's. But I think that is the basis of his plan, that value investors seeking safe income would value the dividends more highly than growth investors would.
Einhorn did make a case (with evidence and numbers) that Wall Street seems to value large tech companies at a higher PE the less cash as a percentage of market value they hold. I realize correlation doesn't imply causation, so it would be wise to explore other reasons for the PE disparities, but it does seem logical to me. It appears they have a "show me" attitude towards cash, and only give credit for it when it is returned it put to use to generate EPS growth. This supports the idea that investors are currently pricing very little of that cash into AAPL's price, which is evident to me in that a 10 PE is hard enough to support, much less a 7 PE if they were getting full credit for the cash.
I think I have been very reasonable, thoughtful, and fair. You won't find anyone more interested in understanding the truth without regard to "winning" an argument. If you are disappointed, perhaps I have misjudged you, but hopefully that is not the case.
That ignores the simple solution which accomplishes the same thing. If Apple wants to distribute more cash, they can do so simply by increasing the dividend without adding the complexity of preferred shares. So one can't use "greater dividend would increase share value" as an argument in favor of the preferred shares since you can get the same result without using preferred shares.
(In fact, buying back shares would probably be even better due to tax consequences, but that's a separate matter).
I'm not ignoring anything, and I find it very frustrating to make an effort to communicate my perspective only to have it ignored. I have acknowledged many times, as Einhorn also does, that a dividend or buyback would also be beneficial. I have stated specific reasons why it is plausible Einhorn's plan is more effective at supporting share price and is as or more tax efficient. Not certainly, just plausibly, and I happen to find the arguments compelling. You are free to make your own decision.
Analyse it as much as we might want - there is no guarantee that it will play out this way or that way or some other way we may not know about or haven't considered.
For me I go long term and look to fundamentals. Thats just me.
Vote as you see fit.
edit: and to be clear Im talking about Apple the company that actually produces things that make a difference in our lives not the fundamentals of AAPL in the sharemarket. The company is the cash cow not the market. That is why I have taken the opinion that I have - anything that does not benefit Apple in its operations or may impair Apple in its operations is unnecessary.
I see another market trading in iPrefs as unnecessary.
I see more analyst comment on that market as being unnecessary.
I make the point again - my view is long term.
I trust the board to govern Apple through this, as I see so do you.
Comments
Quote:
Originally Posted by jrob
Just read Einhorn's PowerPoint charts .....
.....
- Large buyback would deplete cash and require paying high taxes on repatriated cash
- Larger dividend wouldn't increase share value as much......
- If Einhorn is correct and the iPrefs fetch $50 and a 4% yield, they are essentially borrowing $47B at 4% interest from iPref buyers to pay a dividend to investors who sell their iPrefs. Except there is no chance of default, since iPrefs are equity not debt. ......
(i) A buyback of $30 - 40B or so would not require repatriation of funds at all. That amount takes into account what will come in during the next year domestically, and subtracts Apple's already committed dividend and buyback as well as net reinvestment needs for the rest of the fiscal year.
(ii) There is absolutely nothing in Einhorn's analysis that shows a larger dividend wouldn't increase share value. It is pure surmise on his part. Period. (If there is actual analysis there, please share it with us).
(iii) The issuance of Prefs changes nothing at all about the Apple's ability to generate free cash flow, which, in turn, comes from the real things it is doing as a business, i.e., with its assets. Einhorn's proposal is merely financial engineering on the liabilities side of the balance sheet. It may (or may not) have some second order value impact, at best. Unless Apple does something to continue to dramatically grow its cash flow by producing and selling more of the existing stuff (e.g., China Mobile, India, Brazil....) and creating new stuff (e.g., iTV, iCar, iHealth, iEducation, India, Brazil,......) it cannot grow its value for the future in a sustained way.
For a really substantive analysis of why Einhorn's proposal amounts to a hill of beans because it does nothing whatsoever to alter the cash flows (or cost of capital) of Apple's business, see: http://aswathdamodaran.blogspot.com/2013/02/financial-alchemy-david-einhorns-value.html ;
Couldn't have said it any better myself!
----
Btw, please ask yourself: If this was all so simple and obvious to do, why aren't dozens of companies who are flush with cash doing this in droves? Are they all just collectively stupid, and/or is Einhorn more smart than all of them put together?
One final point: the only large publicly traded companies that issue preferreds are some of the most staid, old businesses in the US, e.g., utilities. Is that the pool you see Apple belonging to?
PS: Fixed a couple of typos.
Thanks for the thoughtful reply anant. I read the link to Aswath Damodaran's commentary, and it is the strongest case I have heard made against Einhorn. I do agree with much of what he says. However, on some points I am less convinced. And he does seem to believe that it is possible that Einhorn's proposal could increase the price if not "value". That is, common + pref would be valued higher than common without prefs.
On the issue of whether it increases value, I believe it does, or at least the value to shareholders. Is a cow not just a bunch of steaks, hide, organs, etc? So they are of equal value right? Or is the sum of its parts more valuable than the whole, because many people have no use for a cow, but are interested in its different parts such as a steak. In this case, separating the parts "unlocks value". In the same way, by separating the growth vehicle (common) from the income vehicle (prefs), the total value to each owner may be higher than the original value. If this increases demand from previously uninterested parties, then that may be supportive to price as well.
This is what Aswath says: "If investors are discounting cash for one or both of these reasons, the preferred stock may serve to increase the price because it commits Apple to returning the cash (in the form of preferred dividends) in perpetuity. "
The more important question to me than which companies typically issue preferred stock, is why should Apple do it? And who would want to buy the preferred shares, at what interest rate, and how much? $235B worth (the face value of 5 iPrefs per share) at 4% or less? Could they sell bonds instead and then do a large one-time divi? If so, how much and at what rate? Is issuing preferred shares preferable?
Aswath pointed out alternatives such as giving a bond to shareholders, but noted the disadvantages of doing this instead, such as potential for default and unfavorable tax treatment for current investors. I would vote no on that.
It's true Apple could do a large buyback, but that would eat basically all US cash and would be a smaller commitment than Einhorn's plan. I suppose they could lay out a plan for future buybacks, which might help comfort investors concerns as well. This would be fine if Apple is not planning to use any of that domestic cash for acquisitions etc. And I'm not sure it would be better than or as good as the prefs.
A larger dividend would be ok, but I see Einhorn's logic on why it may be less bang for the buck because the divis would likely remain under appreciated. Of course this is speculation, but he did give some examples of other companies with high divi rates, so it is certainly a reasonable possibility. I think I'd prefer buybacks anyway, at these prices.
I see Apple as a unique company (huge market cap, huge profit growth, high margins) with a unique problem on its hands (huge cash balance). I'm sure if Einhorn's proposal is the best, Apple will realize it, so I'm not concerned. In most cases I cringe when I hear the words finance and innovation together, but I haven't yet figured out why in this case it is a bad thing.
Anant, you and Aswath made a case for why other alternatives are valid and that Einhorn's claims might be overstated. But I didn't see any reasons why it is a horrible idea or bad for shareholders, as many here seem to believe.
That's not what he said. If you read more carefully, he said that it's possible that issuing preferred shares might increase the price - but no more than simply increasing the dividend on the common shares. When you consider tax consequences, share buy-backs may be the best of all.
The article has been moved from the location given above. Here it is:
http://aswathdamodaran.blogspot.com/2013/02/financial-alchemy-david-einhorns-value.html
Basically, it's all the things I've been saying on this topic all along.
Quote:
Originally Posted by jragosta
Exactly.
As a shareholder, you are entitled to about 1 one billionth of Apple - everything it owns, including cash, profits, IP, and so on - for each share that you hold. Distributing cash doesn't do anything to the true value of your holdings. You simply transferred it from one pocket to another (except that you have to pay taxes on the transfer, so you're actually worse off).
Right, the same as $450 in the bank earning .001% interest in perpetuity is the same as 1 share of AAPL right? Returning that cash to shareholders is the same as letting it waste away earning .001% interest. No chance they would do anything more productive with it. Mind you, I'm not saying its not worth it for Apple to keep the cash around if it has plans to use it, but it does come at a cost. Opportunity cost, plus value lost to inflation.
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Originally Posted by jragosta
That's not what he said. If you read more carefully, he said that it's possible that issuing preferred shares might increase the price - but no more than simply increasing the dividend on the common shares. When you consider tax consequences, share buy-backs may be the best of all.
The article has been moved from the location given above. Here it is:
http://aswathdamodaran.blogspot.com/2013/02/financial-alchemy-david-einhorns-value.html
Basically, it's all the things I've been saying on this topic all along.
I didn't say he did. Just that it could increase price from current, which I would describe as unlocking value. But that's just semantics. I find Einhorn's reasoning on why it could unlock more value than divis to be more compelling than AD's rebuttal, but really no way to know for sure.
When I consider tax consequences, it looks like the best option might be the preferred shares, especially for those who sell them, if indeed it just results in an adjustment to the cost basis of the common shares. That is, basically a non-event, unless I am mistaken which is possible.
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Originally Posted by jragosta
Wrong. It doesn't really add anything. Apple can increase dividends to whatever level they want even without Einhorn's proposal. Heck, Apple can even borrow money to pay dividends if they wish without issuing preferred stock (even though that's a ridiculous idea). It doesn't free up one penny of value.
Einhorn's proposal adds nothing - except a way to take advantage of uninformed investors.
Please explain, how is this taking advantage of uninformed investors? Thanks.
You're obviously confused.
First, no one is talking about 0.001% of anything. Since you're clearly imagining things, it's hard to figure out just what you're trying to say - you clearly don't understand business finances.
Second, you've completely ignored the impact of value on price. In a perfect market, a $1 drop in cash would lead to a $1 drop in share price, so distributing dividends would have exactly zero impact on share price.
Third, Apple obviously thinks they have a reason to keep some cash around. They've done very well by their shareholders for the past decade. Why is it that so many people who have no clue how to run a business (much less a successful business like AAPL) insist on telling them how to do it.
Fourth, you're ignoring tax consequences. If the cash remains in the corporation, you get the money when you sell - and it is therefore treated as capital gains. If they issue a dividend, it is taxed at income rates. While there are temporary rules which minimize the difference, historically, income has been taxed at roughly twice the rate of capital gains.
Fifth, even if you feel that a larger dividend is needed, simply increasing the dividend for common shares is more efficient and less costly. There's no reason for preferred shares (which is why very few manufacturing companies use them).
Sixth, because of tax consequences and the low share price (7 times cash-adjusted earnings), the most effective way to use the money is to increase the share buybacks.
Anything that makes stock ownership more confusing and complex benefits institutional holdings more than individuals. Unless you think that the average Mom and Pop investor is as financially knowledgable as a massive brokerage, it puts them at a disadvantage.
Now, individual investors will always be at something of a disadvantage, but that doesn't justify making it worse.
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Originally Posted by jragosta
It serves no useful purpose. If Apple wants to give more money back to the shareholders, they can do so simply by increasing the dividend. No need for preferred shares.
Right on. Another class of shares just messes up Apple's stock.
Apple could simply issue a special dividend after each years results.
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Originally Posted by JoshA
Apple could simply issue a special dividend after each years results.
Not a bad idea, but then, a share repurchase is far better: At least, they can get their own shares to keep as treasury stock in return, to use for future employee option exercise (and thus mitigate dilution).
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Originally Posted by jragosta
You're obviously confused.
First, no one is talking about 0.001% of anything. Since you're clearly imagining things, it's hard to figure out just what you're trying to say - you clearly don't understand business finances.
Second, you've completely ignored the impact of value on price. In a perfect market, a $1 drop in cash would lead to a $1 drop in share price, so distributing dividends would have exactly zero impact on share price.
Third, Apple obviously thinks they have a reason to keep some cash around. They've done very well by their shareholders for the past decade. Why is it that so many people who have no clue how to run a business (much less a successful business like AAPL) insist on telling them how to do it.
Fourth, you're ignoring tax consequences. If the cash remains in the corporation, you get the money when you sell - and it is therefore treated as capital gains. If they issue a dividend, it is taxed at income rates. While there are temporary rules which minimize the difference, historically, income has been taxed at roughly twice the rate of capital gains.
Fifth, even if you feel that a larger dividend is needed, simply increasing the dividend for common shares is more efficient and less costly. There's no reason for preferred shares (which is why very few manufacturing companies use them).
Sixth, because of tax consequences and the low share price (7 times cash-adjusted earnings), the most effective way to use the money is to increase the share buybacks.
1. You are confused. I was speaking about the interest cash earns. .001% was hyperbole to indicate "piss poor returns".
2. We don't have a perfect market obviously. I'm not ignoring anything.
3. I clearly indicated respect for Apple's ability to make good decisions.
4. You have ignored everything I said about tax consequences. Are you even reading my comments?
5. See previous comments
6. See previous comments
I am only interested in honest exchange of ideas. You clearly just want to argue and be right, even if it means ignoring what I have said or mischaracterizing it.
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Originally Posted by jragosta
Anything that makes stock ownership more confusing and complex benefits institutional holdings more than individuals. Unless you think that the average Mom and Pop investor is as financially knowledgable as a massive brokerage, it puts them at a disadvantage.
Now, individual investors will always be at something of a disadvantage, but that doesn't justify making it worse.
I agree with this in general. In this case, it could be worth it, but perhaps not. I was more considering the current shareholders, who would have a simple decision to hold or sell. But it does make things more complicated. The thing is, simplicity has not worked out so well either, so not sure this could be any worse.
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Originally Posted by jrob
I agree with this in general. In this case, it could be worth it, but perhaps not. I was more considering the current shareholders, who would have a simple decision to hold or sell. But it does make things more complicated. The thing is, simplicity has not worked out so well either, so not sure this could be any worse.
Forget about what shareholders could get from iPrefs and consider if its going to be good for Apple.
What comes out of this if it is adopted -
another market Wall St can trade in.
another indicator analysts can comment on.
Are any of those going help or hinder Apple going forward ?
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Originally Posted by RobM
Forget about what shareholders could get from iPrefs and consider if its going to be good for Apple.
What comes out of this if it is adopted -
another market Wall St can trade in.
another indicator analysts can comment on.
Are any of those going help or hinder Apple going forward ?
I'm not sure how this affects Apple at all, except less obscene cash reserves. Not sure what affect it has on employee stock options, which I would imagine would be a factor in Apple's decision on what to do with the cash. Do all choices (divi, buyback, preferreds) benefit option holders equally? And worst case, if Apple doesn't like the effects, it can always buy back the preferreds, right?
If you meant the effect on AAPL, looks like more of the same to me. However, I think it helps AAPL to make a firm commitment to return the cash.
Your criticism is representative of most being made - heavy on fear and innuendo, and light on details of how it will actually cause bad effects. I'm not saying none of them have merit, just that when I try to identify specific effects, the arguments appear weak. I am certainly not a financial guru, but I would expect someone who is would be able to make a solid case, and I have not seen it yet.
Again, I'm sure Apple will make the right decision, so I'm not worried about it at all. I just don't get the vitriole towards Einhorn. Yes, he sued Apple, but he also showed great care in crafting a proposal that gives them the flexibility they have been trying to preserve. Suing Apple was not a great move to build goodwill, but I wonder if there is more to the story that we aren't aware of.
The only thing I fear for Apple is more of the same nonsense we have seen for the past year.
Innuendo ? Well, if you mean that there is no certain outcome from what Einhorn has suggested then innuendo it is in your book. I personally think there's no need - although it somewhat creative.
Does it help Apples operations going forward (sorry, I did mean Apple above not AAPL shares) then I say, No. Not in the long term. IMO only of course.
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Originally Posted by jrob
Your criticism is representative of most being made - heavy on fear and innuendo, and light on details of how it will actually cause bad effects. I'm not saying none of them have merit, just that when I try to identify specific effects, the arguments appear weak.
I am less and less sure of who's throwing around innuendo, after reading the sum total of your posts.
The reason I say that is, Einhorn's analysis is quite weak too, with few specifics, no numbers, lots of surmises and handwaving -- and yet, you seem quite comfortable with his assertions.
The only halfway credible point you've brought up on his behalf is that you say he thinks that somehow, splitting the 'growth' (share price gain) and 'value' (dividends into a separate claim) part will create 'value.' Neither you (nor he) has provided a shred of empirical evidence to back that up, except for an analogy to cuts of meat. Financial instruments that can be easily dissected/replicated in the market are very different from cuts of meat. Any large shareholder who wants to take the stock and securitize it into two separate claims reflecting growth and dividend components could easily do so. Heck, Einhorn could do this himself, if he truly is willing to put him money where his mouth is!
Nor have you, when requested, provided any backup to your paen to Einhorn. I asked you: "There is absolutely nothing in Einhorn's analysis that shows a larger dividend wouldn't increase share value. ....If there is actual analysis there, please share it with us." You haven't. Then I asked you, "If this was all so simple and obvious to do, why aren't dozens of companies who are flush with cash doing this in droves?" You didn't respond to that. Finally, I asked you, "The only large publicly traded companies that issue preferreds are some of the most staid, old businesses in the US, e.g., utilities. Is that the pool you see Apple belonging to?" You ignored that question too.
Disappointing.
That ignores the simple solution which accomplishes the same thing. If Apple wants to distribute more cash, they can do so simply by increasing the dividend without adding the complexity of preferred shares. So one can't use "greater dividend would increase share value" as an argument in favor of the preferred shares since you can get the same result without using preferred shares.
(In fact, buying back shares would probably be even better due to tax consequences, but that's a separate matter).
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Originally Posted by anantksundaram
I am less and less sure of who's throwing around innuendo, after reading the sum total of your posts.
The reason I say that is, Einhorn's analysis is quite weak too, with few specifics, no numbers, lots of surmises and handwaving -- and yet, you seem quite comfortable with his assertions.
The only halfway credible point you've brought up on his behalf is that you say he thinks that somehow, splitting the 'growth' (share price gain) and 'value' (dividends into a separate claim) part will create 'value.' Neither you (nor he) has provided a shred of empirical evidence to back that up, except for an analogy to cuts of meat. Financial instruments that can be easily dissected/replicated in the market are very different from cuts of meat. Any large shareholder who wants to take the stock and securitize it into two separate claims reflecting growth and dividend components could easily do so. Heck, Einhorn could do this himself, if he truly is willing to put him money where his mouth is!
Nor have you, when requested, provided any backup to your paen to Einhorn. I asked you: "There is absolutely nothing in Einhorn's analysis that shows a larger dividend wouldn't increase share value. ....If there is actual analysis there, please share it with us." You haven't. Then I asked you, "If this was all so simple and obvious to do, why aren't dozens of companies who are flush with cash doing this in droves?" You didn't respond to that. Finally, I asked you, "The only large publicly traded companies that issue preferreds are some of the most staid, old businesses in the US, e.g., utilities. Is that the pool you see Apple belonging to?" You ignored that question too.
Disappointing.
Anant, I appreciate your perspective and that you seem genuinely interested in honest discussion. I respect your right to disagree, but think you may be misunderstanding what I have said.
As far as innuendo, I would say Einhorn's arguments are more like speculation, as is any forecast of the effect of the various options on Apple's share price. I have no problem with that, except when someone states a forecast as a fact. I have tried to be clear in my language that it is speculation, and in fact used that very word multiple times I believe.
The innuendo I referred to included a couple of your questions you referred to, as well as others. Why aren't other companies doing this? I don't know, nor do I feel it is a necessary question to answer. It would certainly be helpful to have an answer though, if that same reason applied to Apple as well. Can you tell me why Apple should not do it? If you know, why not just say it instead of asking a question implying an answer? The same applies to your question regarding whether Apple fits the profile of companies who do issue preferreds. You imply that preferreds are only appropriate for that profile of company, but you didn't make any case to support that. Please explain why it is not appropriate for Apple, at least. I did address these questions when I said I believe Apple is a unique company with a unique problem, which is a reasonable hypothesis. Clearly Wall Street believes it has a fundamental difference, to give it such a low PE despite growth prospects in line with similar companies which are valued much higher on a PE basis.
It is apparent you haven't looked at Einhorn's charts, and I honestly don't know why you would waste time arguing against something you don't even know the details on. Asking me to fill in the blanks for you is not productive or considerate. I realize I am asking the same of you, but only because I have done as much research as I was able to already. I took the time to at least hear the other side (Einhorn, at that point), and found his plan to seem reasonable. But being skeptical, I am seeking input from others in hopes that if there is a downside to his plan, they might enlighten me.
For instance, neither Einhorn nor I said a larger dividend wouldn't raise the share price, just that it likely would be less bang for their buck. In fact he laid out a scenario of doubling the dividend, and the various prices implied at different yields. If Apple were priced according to a dividend yield of 4%, for instance, it would trade at $530. At 4.5%, it would be $471. So he at least does have concrete numbers for much of his arguments, and explanations for why he believes a certain outcome is likely, if not certain. Of course there is speculation involved, out of necessity. I have not and will not criticize anyone who assesses the probability of outcomes differently.
I think I supported my claims of unlocking value as well as I am able, and I think they are very reasonable. We will have to agree to disagree here. The only thing more I could add is to reiterate, the low interest rates could possibly result in a lower yield on the preferred being acceptable than in a different environment, so it might fetch a higher value than normal. But, the common might need to adjust less than the preferred value, basically because it has just secured cheap financing. This is my own speculation, not Einhorn's. But I think that is the basis of his plan, that value investors seeking safe income would value the dividends more highly than growth investors would.
Einhorn did make a case (with evidence and numbers) that Wall Street seems to value large tech companies at a higher PE the less cash as a percentage of market value they hold. I realize correlation doesn't imply causation, so it would be wise to explore other reasons for the PE disparities, but it does seem logical to me. It appears they have a "show me" attitude towards cash, and only give credit for it when it is returned it put to use to generate EPS growth. This supports the idea that investors are currently pricing very little of that cash into AAPL's price, which is evident to me in that a 10 PE is hard enough to support, much less a 7 PE if they were getting full credit for the cash.
I think I have been very reasonable, thoughtful, and fair. You won't find anyone more interested in understanding the truth without regard to "winning" an argument. If you are disappointed, perhaps I have misjudged you, but hopefully that is not the case.
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Originally Posted by jragosta
That ignores the simple solution which accomplishes the same thing. If Apple wants to distribute more cash, they can do so simply by increasing the dividend without adding the complexity of preferred shares. So one can't use "greater dividend would increase share value" as an argument in favor of the preferred shares since you can get the same result without using preferred shares.
(In fact, buying back shares would probably be even better due to tax consequences, but that's a separate matter).
I'm not ignoring anything, and I find it very frustrating to make an effort to communicate my perspective only to have it ignored. I have acknowledged many times, as Einhorn also does, that a dividend or buyback would also be beneficial. I have stated specific reasons why it is plausible Einhorn's plan is more effective at supporting share price and is as or more tax efficient. Not certainly, just plausibly, and I happen to find the arguments compelling. You are free to make your own decision.
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Originally Posted by jrob
You are free to make your own decision.
Exactly.
Analyse it as much as we might want - there is no guarantee that it will play out this way or that way or some other way we may not know about or haven't considered.
For me I go long term and look to fundamentals. Thats just me.
Vote as you see fit.
edit: and to be clear Im talking about Apple the company that actually produces things that make a difference in our lives not the fundamentals of AAPL in the sharemarket. The company is the cash cow not the market. That is why I have taken the opinion that I have - anything that does not benefit Apple in its operations or may impair Apple in its operations is unnecessary.
I see another market trading in iPrefs as unnecessary.
I see more analyst comment on that market as being unnecessary.
I make the point again - my view is long term.
I trust the board to govern Apple through this, as I see so do you.