Seeking Alpha

Pat Stout's  Instablog

Pat Stout
Send Message
Since 1978 have experienced and studied many market cycles in bonds, stocks, options, etc. Tend to question herd thinking, some might call me a contrarian. A big mistake made when young (1970’s) by avoiding bonds and investing in risky stocks. It was a great lesson in risk management. Seek... More
View Pat Stout's Instablogs on:
  • Apple Out Of The Box Cash Uses

    Might Apple (NASDAQ:AAPL) enjoy a better return by spending $10 billion of its cash balance not on share repurchases but rather invested in Best Buy (NYSE:BBY) and or JC Penney (NYSE:JCP) by way of debt purchase or a preferred equity position? Think of the PR and press that could result as the investment might help two struggling firms and possibly save and or create thousands of jobs.

    Both Best Buy and JC Penney's are facing headwinds with bonds offering rather juicy yields.

    According to the FINRA website indicates that Best Buy has an issue with a 5.50% coupon maturing in 2021 with a 6.2% yield, the last price was 95.472. JC Penney's an issue with a 7.95% coupon maturing in 2017 with a yield of 9.6%, the last price was 94.375. If Apple could entice either or both firms to issue say a convertible preferred issue with an 8.0% coupon and a minimal conversion premium it might be an interesting use of cash and a lower cost retail expansion.

    Apple has products that are currently sold in Best Buy and keeping it in business may help sales of various future iProducts. JC Penney's is attempting to remake the shopping experience with a boutique setting, if I understand the story correctly. Apple might be able to expand its retail footprint within JC Penney locations by offering iPhones and iPads. With the rumored iWatch and or Apple TV it might be a good fit within the new JCP and in Best Buy.

    Are the current Apple stores large enough to properly display a rumored Apple TV? The store nearby seems rather small to display a large screen television or media device. Having space in a Best Buy and or JC Penney might provide a better consumer experience. In the case of Best Buy, should an Apple TV appear consumers could be instantly compare it to the competition.

    There would be risks with this strategy but investing in the bonds of Best Buy and JC Penney's could help reduce the financial impact. Granted this could be a very high risk strategy and might reduce the attractiveness of its standalone retail stores. However given the low earnings on cash, the idea could be slowly rolled out by only making use of the cash-flow generated from the fixed income investment.

    Another idea would be to explore if the Best Buy and or JC Penney would, or could, issue a new convertible preferred issue, say a $2.5 billion investment in each with a 7.0% coupon. That could throw off $350 million a year in cash-flow and help fund numerous pilot store locations. And possibly expand the locations selling Apple products. Apple could staff the stores with Apple trained retail staff to ensure the customer experience.

    Or Apple could use its cash to buy back its stock by spending a $1 to add pennies to earnings per share. This seems to be the favorite solution of Wall Street and many analysts. How many firms can you name that created shareholder value since 1999 via the repurchase of shares?

    The choice of how to spend the cash could boil down to whether Apple wants to invest in its business by creating jobs and or developing venues to distribute its products or shrink the business by repurchasing its stock. Repurchasing stock suggests the firm has no investment opportunities and does not want its owners to have the opportunity of reinvesting the cash as they see fit; either back into the company, buying company products and or investing in other opportunities.

    I would have more interest in Apple stock if it used its cash in an out of the box fashion and no interest if it continues providing owner's cash to departing owners. The old adage about follow the money suggest a share repurchase is an incentive to sell, not a reason to buy. Besides how is an investor to know if the cash received from selling stock comes for the company? About the only way they could know is if the firm did a Dutch tender giving all owners the opportunity to exchange shares for the firm's cash.

    There are many ways Apple can use its cash. Time will tell what happens.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: AAPL
    Feb 13 2:39 PM | Link | Comment!
  • What Will Dell's Board Do?

    There are media reports suggesting Dell (NASDAQ:DELL) might go private with a potential buyout at $13.00 to $14.00. However that price might need some improvement. Here is why.

    According to Dell's SEC filings. The board of Dell has spent over $32 billion repurchasing 1.2 billion shares for an average cost of $26.67. Granted this transfer of owner's monies to departing owners was expended over a number of years and a deal at this price doesn't seem likely.

    However, for the nine months ending November 2012 the board spent $700 million repurchasing 46 million shares for an average cost of $15.22. If a deal is to be done, it should be a premium to this price. Otherwise the board will admit to overpaying for the shares more recently repurchased, wouldn't they?

    Dell has a number of long-time board members and it shall be interesting if they will entertain and or approve a bid that would sell the company at a price below the more recently purchased shares.

    In my opinion, had the board returned cash to owners, rather than to stock sellers the price today might be far higher, being supported by a generous dividend.

    Time will tell what happens with the rumors of a deal and if a deal is done what the price might be. Should Dell's board agree to a deal below its more recently purchased shares, it should put to rest the notion that share repurchases add value, wouldn't it?

    Disclosure: I am long DELL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: DELL
    Feb 02 2:59 PM | Link | Comment!
  • The Senate Voted To Cut Taxes: Economy To Benefit?

    The US Senate on July 25th voted to cut taxes. The Republican proposal to extend the current tax policy was defeated. It shall be interesting to see what the House of Representatives does. Should the House decide to reduce taxes, it might take the tax side of the fiscal-cliff off the table and provide some certainty for business and investors. That could be a positive catalyst for the stock market.

    Given the talk over taxes. It was decided look at the tax liability and perform the calculation for a married couple with $237,700, $383,350, $500,000 and $1,000,000 in income. The results came as a surprise given the talk of higher taxes.

    It is assumed that gross income equals taxable income, to provide the more conservative tax liability figure. Granted most may not pay this amounts thanks to deductions. Think of the figures as the worst case, before deductions and or the cost of tax preparation.

    A married couple with $237,700.00 in income would have the following tax liability.

    • $63,035.00 under the current law
    • $54,490.50 under the President's budget
    • $55,643.00 under current policy

    The President's budget provides $8,544.50 in savings versus current law. That in my book is a tax cut. Actually the President's budget shows the lowest tax bite.

    A married couple with $383,350.00 in income would have the following tax liability.

    • $115,469.00 under current law
    • $106,924.50 under the President's budget
    • $103,707.50 under current policy

    The President's budget is lower than current law, that counts as a tax cut. The current policy has the lowest tax bite.

    A married couple with $500,000.00 in income would have the following tax liability.

    • $157,463.00 under current law
    • $148,918.50 under President's budget
    • $142,202.00 under current policy

    The President's budget reduces taxes from the current law, a tax cut. The current policy shows the lowest tax burden.

    A married couple with $1,000,000.00 in income would have the following tax liability.

    • $359,662.40 under current law
    • $351,117.90 under President's budget
    • $319,535.00 under current policy

    The President's budget reduces the tax burden versus current law. The current policy shows the lowest tax bill.

    The budget of the President at all income levels reviewed provides for lower taxes compared to the current law. This is a good thing.

    Source data from the Tax Policy Center.

    Should the Senate and the House pass the budget, then maybe business could stop worrying about an increase in taxes and enjoy a tax cut. It might assist the stock market to regaining it footing.

    Current Law versus President's Budget:

    President's Budget versus Current Policy:

    Conclusion:

    Taxes under the budget of the President is lower than under current law. Everyone enjoys a tax cut, the wealthy too. However, under current policy (Bush tax cuts in place) a small segment of the population would face a tax increase assuming the data from the Tax Policy Center is accurate.

    This is a simple analysis of the tax rates looking solely at worse case. Some income enjoys special treatment and some income is not subject to tax as a result of the standard deduction ($9,800 under current law, $11,700 under President's budget and $11,700 under current policy) and the personal exemption of $3,750.

    Reducing uncertainty should be good for business and investor confidence. This is turn might bring cash off the sidelines and into the stock market. The bond market might see a reduced fear bid. The economy could see a picking in growth. Stocks could climb as earnings grow with p-e expansion.

    Bottom-line lower taxes could be good for the economy, the stock market, investors, employees and taxpayers. It would be nice if the House passed the Senates tax bill. It would provide the winner of the November election a year to revamp the tax-code and lift the cloud of uncertainty. Time will tell what happens, but the economy and the stock market could lift off if taxes are cut.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: economy
    Jul 26 3:52 PM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.