Dear Mr. Cook,
I am writing to provide you with my view of the sort of advice that you ought to have been receiving from the Board. As you acknowledged at the AGM, the performance of Apple's (AAPL) share price has been disappointing over the past 6 months. The bare facts are that the price has fallen dramatically since the peak in September 2012 despite sound fundamentals.
This "untoward" movement will inevitably have a deleterious effect on the reputation of not only AAPL but also Apple itself and is potentially extremely damaging to staff morale and also to your loyal customers. This aspect has been addressed eloquently in an article by Bret Jensen (3 Things Apple Must Do To Regain Its Dominance) and I do not propose to rehearse them again.
Having been in equity capital markets for 20 years, as a general rule I am not in favor of responding to the vagaries of the market, but the decline we have witnessed in the AAPL price is of such a magnitude that I believe it warrants action and now.
The simple fact is that Apple shares are no longer trading on any fundamental basis and are being driven entirely by sentiment, and it is against this background that I feel it is vital that Apple seize the initiative and generate a more compelling narrative.
In simple terms, shares fall if there are more sellers than buyers so the task is to address this and related issues. In this context, I would propose the following steps to attract a new and diverse investor base:
Enhanced Dividends (for yield hungry investors, widows & orphans)
- Investors are hungry for yield (we are seeing BB credits priced below 3% in some cases). Against this background the dividend should be increased with immediate effect to provide a dividend yield of 7.5% (cost c$30bn vs. FCF last year of $56Bn). This action would attract a new church of yield-hungry investors, thus providing an immediate boost to the price.
- The Board should state that the dividend would be maintained at that level for the next 3 years funded, if need be from borrowings or reserves. This would further provide a platform for the price if not a further boost.
These actions would attract and retain a very wide range of dividend-seeking stable investors and should also ensure that the shares are less volatile in the future. Moreover, this level of dividend could be funded from annual cash flow projected at c$56billion.
Stock Split (for Tracker funds and small retail investors - with private pensions)
A further group of investors could be obtained by effecting a stock split. In theory, this has no effect on value, a point that was made by the Board after last year's AGM (they saw little support that it helps the stock). But this argument assumes that markets are rationale, which clearly they are not, and that investors can all afford a large stake for even 1 share. The new price should be in the order of $10 and would have a number of beneficial effects. First, it would make it easier for investors with limited funds to buy a 'round" lot. Historically buying less than 100 shares was considered an odd lot and often attracted less favorable bid-offer spreads; second, it seems likely to increase the likelihood that AAPL would be included in the Dow Index which would force numerous tracker funds to buy in, providing further support and less volatility.
Secondary / Dual Listing (to attract foreign investors)
Apple is enjoying fantastic growth in China and the Far East in contrast to other major companies who are not present in the market (e.g. Google (GOOG)). Apple should seek to capitalize on this goodwill by seeking a secondary listing on one of the main markets in China; ideally the main Shanghai Exchange or failing that, the Hong Kong market. I believe the Chinese authorities would welcome this development (especially for the Shanghai Exchange) and would be eager to smooth the path for this to happen. This, coupled with the lower (split) share price and the enhanced dividend would attract a new and very large investor base from domestic Chinese and other Far Eastern investors who would be able to afford a small stake which cumulatively would represent a significant additional injection of buyers. One potential by-product might be to seek a quid pro quo for the Listing (which would enhance the status of the market vis-a-vis other competing markets especially Singapore) from the Chinese Authorities by putting pressure on (State-owned) China Mobile (CHL) to open the door to a deal with Apple, on advantageous terms to Apple, the next iteration of the iPhone.
Creation of a Dual-Headed Structure (optimize tax planning & enhance the dividend yield)
The remission of funds to the USA to pay dividends is not tax-efficient for off-shore investors who are subject to varying rates of withholding tax which dilute their returns. One solution would be to create a dual-headed structure for the Group similar to those employed by Royal Dutch Shell (RDS.A), Dexia, Allied Zurich and numerous other large groups. This would be implemented by the creation of a new, off-the-shelf company (NewCo) in a reputable but tax-neutral jurisdiction outside the USA and probably the EU. Existing and future shareholders in AAPL would be given a stake in this new vehicle pro-rata to their holdings in AAPL (effectively the shares would be "stapled or twinned" and would to be sold and traded as one invisible unit - I believe this was used by Eurotunnel, Dexia to mention two firms). The sole purpose of the NewCo would be to facilitate the payment of dividends but without the need to remit cash generated off-shore back to the US. This would mean most investors would receive their dividends gross although they would still be liable to tax if they were taxable on these receipts. Even here, however, there may a timing benefit for US shareholders where the tax liability might vest much later (i.e. at the end of the tax year) providing a further small kick to the IRR. (I am not sure how US Institutional investors are taxed, but in the UK pension funds and personal pension funds are not taxed on income but are subject to withholding taxes on US dividends.)
The cash reserves in the USA could be retained for general corporate purposes including for repurchase of equity but also for loans to subsidiaries abroad; repatriation of these loans would not generally give rise to any additional remission or withholding taxes save in a few jurisdictions which could be funded on-shore.
This arrangement would have an additional benefit and one potential drawback. The benefit is that it would enable the Group to release existing deferred tax provisions on the balance sheet ($14 billion?) which would be a further one-off boost to earnings per share plus there would be no requirement to provide for this item in following years representing an ongoing boost to EPS. The drawback is that this plan would generate a high degree of political heat (both politically and from the public) and careful consideration would need to be given as to its implementation. As an aside, it might act as a catalyst to review US tax policy on remission of foreign cash to the US.
I am generally not in favor of these as they tend to indicate the company has run out of ideas and believe enhanced dividends would be a far better way to support the price particularly if the steps proposed above were implemented. Despite this, AAPL should ensure it has the ability to effect buy-backs and could do this opportunistically if required. This could be funded either from an MTN program (which should be implemented as a back stop and means to optimize the capital structure and achieve a natural hedge with revenues) or from a similar arrangement used by J&J (JNJ) when it acquired Synthes. In simple terms, J&J used foreign earnings held at its Irish subsidiary to buy back $12.9 billion in its own shares from Goldman and JPMorgan. In the case of AAPL, the shares would be purchased in the first instance by an investment bank(s) payment being funded from Apple's non-US operations. If need be, the shares could be purchased by a bank outside the US to avoid any issue with remission of proceeds to the US.
I am not an operations man but gather that NAVQUEST mapping owned by Nokia (NOK) forms the backbone for much of the information used by a range of maps possibly even Google Maps. If this is true, it might be worth buying Nokia for the mapping business and IPR alone then on-selling the rump handset business. Nokia's current market cap is $14 billion, roughly the same as Apple's deferred tax liability.
Strengthen the Board
To reiterate Bret Jensen, "you have a fantastic operations mind, but it is going to take more than that to right the company's ship" and I believe you need the assistance of a Board who are in tune with financial matters. The recent events and the view on stock splits does suggest that new blood is needed with a better understanding of how the markets work. We all want Apple to produce great products, but the Company is a public one and the Board have a legal/fiduciary duty to shareholders first and foremost. I have not had access to the internal deliberations of the Board and may be wide of the mark here; if so I apologies for any offense.
Disclosure: I am long AAPL.