Shares of Apple (AAPL) rallied over 2% in the final 30 minutes of trading Thursday because the company finally showed some signs that it does, in fact, care what shareholders think. The subject of the statement was Greenlight Capital's David Einhorn's suit filed against the company urging shareholders to reject the upcoming "Proposal 2." The proposal effectively removes the ability of Apple to issue preferred stock (although Apple said preferreds could still be issued with shareholder approval). Einhorn believes that issuing preferred stock would be one way for Apple to unlock the value that is held on its balance sheet. Einhorn is right that something needs to be done, as Apple is making close to nothing on its ~$130 billion cash hoard. Einhorn asserts that for every $50 billion in perpetual preferred shares Apple issues, $32 per share of value will be unlocked. I won't get into his math and whether he's right or not, but his idea of Apple issuing preferred shares to Apple common stockholders is an intriguing one. Apple is viewed, correctly or incorrectly, as a maturing tech giant. As such, growth investors are probably looking elsewhere to invest their capital, as we've seen in the past few months with the drop from $705 to the $450 region.
With this shift in the shareholder base to a more long-term, value-oriented investor, dividends and buybacks become ever more important as time passes. When Apple was growing earnings at ridiculous rates each year, nobody cared about the lack of a dividend or buyback program. Now that the growth has slowed significantly, shareholders want capital returned to them to defray the cost to shareholders of slowing earnings growth. Einhorn is right in demanding that the massive amount of capital Apple holds on its balance sheet be returned to shareholders. Whether you agree with issuing "free" preferred stock to common shareholders or not, Einhorn is thinking outside the box, and his suit against Apple is making the company do the same. All of this is net-positive for shareholders, as Steve Jobs would never have held such a discussion.
This brings us to Apple's statement, in which the company stated it was in active discussions about how to return capital to shareholders. In addition, the company addressed Einhorn specifically in saying that it was evaluating the proposal, and that the company is committed to having a dialogue with shareholders.
This would be pretty basic stuff for many other companies, but since Apple under Steve Jobs showed outright disdain for shareholders' desires, this is a monumental event for Cupertino. The reason the shares popped over 2% in a matter of minutes is because the capital returns investors have been clamoring for from Apple are finally on the horizon. I have previously stated in my articles that Apple will most likely increase its dividend and/or institute a larger buyback program than what is currently in place during its February Board meeting. After today's announcement, I am more confident than ever that this will happen, and this is overwhelmingly positive news for Apple shareholders.
Until the Board meeting is concluded and we get some clarity as to what Apple plans to do with its massive cash hoard, we won't be able to quantify the impact of the change in attitude of Apple management. However, qualitatively, this development of Apple finally engaging in a dialogue with investors and showing that management cares what shareholders think is terrific news for investors in Apple shares. However, after today's developments, I am so much happier to hold my Apple shares, as I don't have to wonder if management will begin to return some more cash to shareholders -- this was confirmed today. The Jobs attitude of ignoring shareholders is gone, and a new era of shareholder friendliness is being hastily ushered in by Tim Cook.
Disclosure: I am long AAPL.