Outspoken fund manager David Einhorn feels so strongly about the need for Apple Inc. (Nasdaq: AAPL) to share more of its cash with its stockholders that he has sued the company.
Shareholders like Einhorn - whose Greenlight Capital fund owns between 1.3 million and 1.5 million shares of AAPL - think the Cupertino, CA-based company should use its monstrous cash pile of more than $137 billion to boost its return.
Einhorn's lawsuit came after his request last year that the tech giant create shares of preferred Apple stock that would exist solely to pay a dividend about twice what the common stock currently pays.
But Apple has included a proposal on its Feb. 27 shareholder ballot that would amend the company's corporate charter to eliminate its ability to create preferred stock. It also has combined that issue with two other unrelated issues in the same proposal.
Einhorn is suing Apple because he says Securities and Exchange Commission (SEC) rules prohibit such bundling, and because he wants to ensure the company will be able to create the type of preferred shares he has proposed.
To further hammer home his point, Einhorn wrote a letter to all Apple shareholders, which was released today, in which he explained his position and urged them to vote against Proposal 2 in the shareholder ballot.
"Proposal 2 is value destructive, impedes the Board's flexibility, and does not merit shareholder support," Einhorn wrote.Why David Einhorn Is Suing Apple Now
Einhorn points out in his letter that Apple stock has plunged almost 35% from its highs in September.
Apple's soaring stock price was more than enough to keep investors happy, but now few expect AAPL to resume its steep upward trajectory.
With Apple having reached such titanic size that the growth rates of 50% to100% that propelled the stock to $400, then $500, then $600, then $700 are no longer sustainable.
Investors who can't count on steady and rapid growth are going to expect a company to reward them in other ways, such as dividends.
And few companies are as well-equipped to reward shareholders as Apple.
Thanks to the extraordinary success of such products as the iPhone and iPad, the tech giant's cash hoard has ballooned from $15.4 billion in 2007 to $137 billion now. Not only is that the most of any U.S. company, it's growing at the rate of $40 billion a year.
"Apple has $145 per share of cash on its balance sheet. As a shareholder, this is your money," Einhorn wrote in a letter to all Apple shareholders. "Though Apple recently commenced paying a common dividend and initiated a nominal share repurchase program, we believe that there is much more that the Board should do for shareholders."How the Einhorn Plan Benefits Apple Shareholders
Einhorn's plan sounds familiar, but is unique.
He has proposed the company create $50 billion of preferred shares Like traditional preferred stock, the new AAPL stock would pay a high-yield dividend - about 4% in this case - and have no voting rights.
Unlike other preferred stock, however, the new AAPL shares would not be sold at market, but distributed to current shareholders.
The new Apple stock also would be permanent - investors could buy and sell it among themselves - but would never mature. That removes one of the bond-like qualities typical of most existing preferred stock and ensures Apple would never need to pay it back or refinance it.
In his letter, Einhorn said every $50 billion of preferred stock Apple created and distributed "would unlock about $30 billion, or $32 per share in value. Greenlight believes that Apple has the capacity to ultimately distribute several hundred billion dollars of preferred, which would unlock hundreds of dollars of value per share."
By creating $50 billion of preferred stock as Einhorn describes, Apple would not have to dip into its cash pile as it would with a special dividend, and would pay out just $2 billion a year - easily covered by profits.
In a phone interview on CNBC's "Squawk Box" program, Einhorn said the two types of stock would serve different classes of investors. The common stock will keep its smaller dividend and be more likely to capture gains from future growth, while the preferred stock would appeal to pure income investors.
Einhorn said the idea is a "win-win" for all involved. He specifically cooked up the plan to give Apple a way to supply a larger dividend without sacrificing a large portion of its cash.
Einhorn explained to CNBC that Apple has a "Depression" mentality brought on by several financial traumas in its history, most notably the company's close brush with death in 1997, in the months following the return of CEO Steve Jobs.
"We recognize that the company wants to have a very large cash hoard," Einhorn said. "We came up with what we think is a solution where Apple can maintain its cash and its strategic flexibility and its comfort money and its war chest. At the same time, shareholders can receive the value that is embedded within the balance sheet."
AAPL shares rose nearly 3% Thursday to close at $468.25.
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- The Wall Street Journal:
Einhorn's Letter: Dear Fellow Apple Shareholder
Apple Should Distribute Cash, Not Hoard It: Einhorn