They provide market liquidity and arbitrage.
The fact most of them lose money or do no better than the S&P is actually good for everyone else generally.
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Judge Blocks Vote on Proposal 2 at Next Week's Apple Shareholder Meeting
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The fact most of them lose money or do no better than the S&P is actually good for everyone else generally.
This method of "porking up" proposals is nothing new. Just look at the U.S. Congress.
This brings up an interesting question about the best way for a company to reward its shareholders. If it pays a dividend then the shareholders will be taxed on it at their standard tax rate, which varies based on your income.
If it does a buyback of shares then the stock price may go up and the shareholders will have a larger unrealized gain (assuming they bought in low). In this situation there would be no taxable event until the shareholder sells his shares, which could be years from now (capital gain). The tax rate will depend on what the long term or short term rates are, which changes all the time with new presidents and congress. But I believe those rates are lower than the standard rate that would be taxed for dividend income.
A rule of finance is to always defer taxes, so I would think that a buyback/capital appreciation would be better than a larger dividend now.
Just my $0.02 but what Einhorn did is great for shareholder rights. You fanboys who are complaining about this shouldn't be playing in the stock market if you can't appreciate the core issue of the lawsuit.
I'll take a stab...
- Einhorn wanted Apple to issue preferred stock.
- Apple tried to bundle a rule into some proposals that are coming up for shareholder voting that would hamper the issuing of preferred stock. eg Preferred stock will unlikely ever be issued.
- Einhorn got mad that they're taking away the *OPTION* to ever issue preferred stock so he sued to block the proposal.
From Einhorn's perspective, taking away this option lowers the value of the stock. It would be like having a stock where the company says that they not only don't issue dividends, it's a written rule that they will never be issued. Some people/hedge funds will be less likely to invest in it. eg Stock value gets lowered.
A preferred stock is a hybrid investment instrument. It's issued and purchased like an equity, but it pays out a higher *guaranteed* dividend, sort of like a bond. It's less volatile than the common stock and so while your chances of making a lot more are less, so is your risk of losing a lot. The plus side is that you would get something like say 4% dividends, guaranteed. So let's say they issue preferred stock at $50. You would then get $2 per share/year ($0.50 per quarter). It takes higher priority than common stock dividends. Thus, if Apple were ever running short on cash (haha), they would have to pay preferred stock dividends first before figuring how much to pay on common stock dividends. The only instrument that takes higher priority than a preferred stock is a bond, which is irrelevant here.
Common stock dividends are not guaranteed. They are there at the pleasure of the board. So if the board suddenly decides they don't want to give out dividends or wants to lower it, they simply do it. Preferred stock's dividends are guaranteed. They are paid whether the board wants to or not. It functions more like a bond. Thus, it's a "hybrid" instrument.
The big idea behind Einhorn's scheme is that it doesn't affect Apple's cash hoard or flow while paying out a dividend they can easily afford, and simultaneously, it attracts investors to the stock. Preferred stock can be converted to common stock though I'm not familiar with the rules on this. I think the companies make the rules.
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Once Apple issued a dividend, which it has not done in many years, it added an entire class of institutional investor that requires income to consider the stock. AAPL yields about 2.4% right now. A 10 year treasury (assumed 100% safe) yields only 1.9%. Goal already accomplished. Recently.
Also issuing Preferred stock AND ALSO declaring it to have a PERPETUAL dividend is just greedy and unlikely and bad policy given the political turmoil we are going through right now.
Keep in mind that while Einhorn would like them to issue preferred stock, it's just a proposal. What he's actually suing about is that Apple is trying to take away that option, not because Apple won't issue preferred stock.
Your argument is true, but the 2.3% is clearly not enough to move the stock price. His proposal is that since the preferred stock would issue higher dividends - something like 4% - it would attract a lot more investors. Which would in turn boost the common stock price. All without touching Apple's cash hoard. It's actually a fairly clever idea.
How so? It simultaneously provides investors peace of mind and stabilizes the stock. People are more likely to let their investment sit and take a chance on Apple's future if their money is going to earn 4%.
It puts a floor on the price since it is inverse to yield.
Nope. Any dividend would reduce net cash. Any stock issue would dilute shareholder value. Issuing a Preferred offering is a special case of diluting shareholder value with securities that have superior claim to assets! If nothing else, Apple has enough capital and does not need to issue more stock to get capital. Therefore any interest to motivate such an effort would be literally a waste of money.
I can understand why Einhorn wishes Apple issues Preferred stock and a perpetual dividend, but AAPL BoD would have to be very stupid to do it.
Rocketman
Apple has to respond to shareholders and take their complaints. In a public company, anyone who owns shares technically owns a piece of the company - and therefore has a right to be heard.
Shareholders also influence the decision making of a company. Meaning that if enough shareholders cry hard enough, a CEO, CFO, COO, etc can be fired. By going private, Apple has the power to do whatever it wants and replies to no one.
That is really the issue at hand here. Einhorn believes that the cash Apple has collected belongs to the shareholders, and is not something the board can just sit on.
He is trying to recollect some of his losses - and that's exactly why he should be ignored. We have biased reasoning here and he doesn't give a damn about the company, just wants his profits.
These are the same morons that sent us over the 2008 cliff that we still have not recovered from. They care about their money, not anyone else's, and certainly not a company (or, with regards to 2008, a country).
My personal opinion is boo-frickin-hoo. If you are that upset with the company, sell your stock and get out. I own shares, and hope Apple tells this guy to stuff it. They did not build their empire by cashing in on iPods and dispersing money to shareholders - they went and build the iPhone and iPad. That turned out pretty well for all of us shareholders as well.
They provide market liquidity and arbitrage.
The fact most of them lose money or do no better than the S&P is actually good for everyone else generally.
When I think of hedge funds I think of Jim Cramer and its not pretty thoughts. Amazing he still has a high profile job on CNBC.
A floor is not what Einhorn wants. He wants the value to go up.
Issuing preferred stock raises capital, so it doesn't. Let's say they issue one share of preferred stock at $50. Then they only pay you $0.50 out of that $50 every 3 months. The net cash is +$50 right off the bat.
No, preferred stock does NOT dilute shareholder value unless it's converted. That's the whole purpose of issuing preferred stock - to not dilute the common stock - while raising working capital.
Most of Apple's cash hoard is unusable because it's outside of the country and they can't bring it in without being taxed heavily @ 35%. Only a small proportion (I think around $40 billion) is in the US and thus would count as "working capital". $40 billion is a lot but maybe not enough for what Apple really needs to start off Apple TV.
I think Einhorn's thinking is that if Apple really is saving up the cash to use for something big like Apple TV content deals, then why not issue preferred stock. It wouldn't dilute the common stock, and instantly gives them the working capital they need for whatever they plan on doing without having to wait to accumulate more.
Again, he's suing because Apple is taking away the option, not because they haven't done it. He's merely presenting this as a way they could accomplish multiple goals IF THEY WANTED TO. To take away the option is what's pointless and that's why he's suing.
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The job of the Board of Directors is to represent the interests of the shareholders. Which means maximize the value of their investment. Granted there are many ways to do this.
Einhorn is correct that the cash is owned by the shareholders, along with the rest of the company's assets. If Apple doesn't like it they should have never gone public.
Apple has so much cash that a nice dividend won't hinder their ability to invest in r&d and whatever they need to create the next great iProduct.
Equating this proposal with the nonsense that went down in 2008 with subprime mortgages is a laughable.
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Without getting political, that was caused by the FEDGOV increasing liquidity to investment banks and commercial banks after 9/11/01, the FEDGOV policy of issuing mortgages to folks with limited credit and income, and the NGO FHA securitizing those mortgages. Bubble formed.
The current bubble is treasury bonds. Careful.
Rocketman
He's there for entertainment value. He does offer good *general* investment advice, but it's nothing new. Where you get into trouble is if you listen to his specific stock advice.
Just imagine how much AAPL could yield if it fell to $300 (that would be 3.5% for the calculator challenged). Mission doubly accomplished!
And people gripe about Einhorn's reasoning.
Aren't most lawsuits?
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Makes me sick. My father was an investment banker with Bear Stearns back in the day, the people he knew/knows, the things I learned growing up. Future traders, hedge fundies, I could tell you stories on the power trips, playing with derivatives, betting against defaults, the truckloads of money. "People with money, make money," sad but true.
So you're saying. "Apple is successful and has earned investors lots of money. So lets destroy them and sell the pieces."
I wanted to add my 2 cents as well about the broader situation.
When I buy Apple stock, I become an owner of the company. I expect the managers to run the company in a way that provides me with a return on my investment. Apple has done well at this for some time. However, there is one really glaring issue, and that is how much CASH apple has.
Companies need cash to function, and they want to keep enough on hand so that they don't have to borrow. They need to be able to do strategic things like purchase other companies, invest in facilities, etc.
What has happened is that Apple has not managed their cash well. They literally have more money than they know what to do with. As an owner this is bad. If they can figure out something to do with that money, they need to give it to the owners to find someone who does know what to do with it. Apple has admitted that they have too much money, but they have done a poor job of laying out plans to return this money to shareholders.
Einhorn may be an jerk, but Apple brought this on themselves because they couldn't find things to do with their cash and they didn't give it out in a way that made their owners happy. Having a $100 Billion is great if you have plans for it. If you don't it actually hurts your stock price. I know it is counter intuitive, but their is a certain level at which having more cash makes the stock worth less. If Apple was making their owners happy, then this wouldn't happen.
When I buy Apple stock, I become an owner of the company. I expect the managers to run the company in a way that provides me with a return on my investment. Apple has done well at this for some time. However, there is one really glaring issue, and that is how much CASH apple has.
Companies need cash to function, and they want to keep enough on hand so that they don't have to borrow. They need to be able to do strategic things like purchase other companies, invest in facilities, etc.
What has happened is that Apple has not managed their cash well. They literally have more money than they know what to do with. As an owner this is bad. If they can figure out something to do with that money, they need to give it to the owners to find someone who does know what to do with it. Apple has admitted that they have too much money, but they have done a poor job of laying out plans to return this money to shareholders.
Einhorn may be an jerk, but Apple brought this on themselves because they couldn't find things to do with their cash and they didn't give it out in a way that made their owners happy. Having a $100 Billion is great if you have plans for it. If you don't it actually hurts your stock price. I know it is counter intuitive, but their is a certain level at which having more cash makes the stock worth less. If Apple was making their owners happy, then this wouldn't happen.
Hedge funds are extremely flexible in their investment options because they use financial instruments generally beyond the reach of mutual funds, which have SEC regulations and disclosure requirements that largely prevent them from using short selling, leverage, concentrated investments, and derivatives.
This flexibility, which includes use of hedging strategies to protect downside risk, gives hedge funds the ability to best manage investment risks.
The strong results can be linked to performance incentives in addition to investment flexibility. Unlike many mutual fund managers, hedge fund managers are usually heavily invested in a significant portion of the funds they run and shares the rewards as well as risks with the investors. "Incentive fees" remunerate hedge fund managers only when returns are positive, whereas mutual funds pay their financial managers according to the volume of assets managed, regardless of performance. This incentive fee structure tends to attract many of Wall Streets best practitioners and other financial experts to the hedge fund industry.
This is completely right, but you know, you're supposed to be opposed to anything a hedge fund manager says. It's meant to an autonomic response, aka, a knee-jerk reaction. It's supposed to end the discussion.
Apple has what we call a "good problem" -- they take in way more income than is required to operate and expand the business. Stockpiling free cash forever is not good capital allocation, and beyond a point, questions begin to pile up along with the money. Unlike his predecessor, Tim Cook acknowledges the problem. He has even said that Einhorn's suggestion is interesting to the board, and not off the table.
Nonsense. The judge didn't rule on the merits of Proposal 2. Rather, he simply held that the three provisions therein had to be voted on separately.
