Apple is facing a lawsuit from Greenlight Capital over the company's proposal to make it more difficult for it to issue preferred stock. David Einhorn says that the company's proposal will close down one avenue for Apple to reward shareholders with more cash.
While Apple is still hugely valued, its stock has dropped 35 percent since September. The company is making money hand over fist, but shareholders would rather they give them a larger share of the profits instead of stashing the money.
"Apple has $145 per share of cash on its balance sheet,” Einhorn said in a public letter to the company. “As a shareholder, this is your money."
Apple has nearly $137 billion in cash, making up nearly a third of Apple's stock market value. It's unusual for companies to hoard as much cash as Apple is, typically either investing it in the company or handing it out to shareholders; most borrow for acquisitions.
Apple has been paying a quarterly dividend of $2.65 per share and started to repurchase some of its share since Steve Jobs' death in October 2011. Stuart Jeffrey at Nomura Securities believes that Apple will generate about another $103 billion over three years to add to the $137 billion it has now, but it has only committed to returning $45 billion of this $240 billion in total cash to shareholders.
The problem is that the company's revenue growth has started slowing; in the recent holiday quarter, Apple's revenue rose 18 percent from a year ago - very good for a company of its size, but not the 50 percent-plus increases it has often posted since the 2007 launch of the first iPhone. There hasn't been a new ground-breaking product for Apple since the iPad in 2010, forcing Apple to expand the appeal of its current products to achieve growth.
What the situation with the growth means is that investors who look for fast-growing companies aren't as interested and those that want regular income aren't as interested either. Greenlight has been a shareholder since 2010 with 1.3 million Apple shares worth nearly $600 million and they want Apple to create a class of preferred stock that carries a higher dividend for current shareholders to better appeal to value investors and those who are risk-averse.
Einhorn indicates he's been talking with Apple to create the new share class, though they rejected the idea in September. Apple will ask shareholders to approve a measure that would force the board to get shareholder approval before issuing preferred shares at the annual meeting on February 27.
Apple indicated in an SEC filing that it does not plan to issue preferred stock in the future and believes it is "appropriate" to eliminate the possibility from its charter. While Greenlight says the proposal bundles three distinct proposals that the SEC requires to be separated so shareholders can vote on each one, The California Public Employees' Retirement System plans to vote for Apple's proposal and it owns 2.7 million Apple shares, nearly three times as many as Greenlight.