"In the long run, we are all dead."
--the great economist John Maynard Keynes
My first reaction to the David Einhorn plan for Apple (NASDAQ:AAPL) was in total agreement with this article: a desperate, ridiculous move designed to create a perception of value when no value is created. I thought to myself, if it were this easy, why doesn't every company do it? You can't pull value out of thin air and distribute it to shareholders. Or so I thought.
But the more I pondered it, the more I realized the Einhorn plan actually makes sense for Apple while it might not for many other companies. Although in the great long term total distribution to shareholders should theoretically remain the same no matter, the textbook retort to the Einhorn plan may be ignoring its own principles. It creates a forced perpetual dividend to current common shareholders at a 4% dividend yield which in itself is a large increase from the current dividend yield over barely over 2%. The whole thing would be wrapped up in a preferred stock spin off essentially which allows shareholders the right to sell the preferred stock sooner rather than wait to collect it later similar J.G. Wentworth commercials trolling for structured settlement recipients "It's your money; use it when you need it"
The textbook theory of what stock prices reflect includes:
1. Present value of risk-adjusted of long term future cash flows.
2. The risk-adjusted time value of those cash flows returned to shareholders, represented as a discount rate.
Einhorn contends that Apple is so tight with its cash hoard that he likened his Great-Depression era grandmother refusing to leave a message on his answering machine in order to save money on the phone bill. With this in mind, the Einhorn plan creates value:
1. The stock itself would continue to reflect the long term future cash flows. No material change there.
2. The preferred stock spin off would remove the uncertainty surrounding future dividend payments by creating an obligation to pay dividends. The lack of confidence in management's dividend policy has created a discount based on uncertainty. Furthermore by making it a direct dividend obligation, the uncertainty is removed of what management may do with its cash hoard including any uncertainty (and its discount) in terms of current or future management potentially making unwise acquisitions.
3. The uncertainty of timing regarding those dividends would be removed. In a potentially much higher inflationary environment for the United State's future, the time-value certainty of dividends can have added value.
4. The preferred stock would have a liquidation preference over common shares.
In short, Einhorn feels there's a severe lack of confidence in management's ability to return perceived and realized value to common shareholders in a timely manner, and his plant rectifies the situation. Not only is the shorter term important because "in the long term we are all dead," but the time value of money alone actually DOES indeed mean even the long term value of AAPL management's tightness with money is negatively affecting shareholders. A forced and fixed promise in the form of a perpetual preferred dividend unlocks value.
Disclosure: I am long AAPL. 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.
Additional disclosure: I frequently trade AAPL calls, puts, AAPL long, and AAPL short. As I write this I currently own AAPL calls.