Mr. Einhorn's Cash Quest
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Not so long ago I wrote in this blog about David Einhorn's opinion on Apple (NASDAQ: AAPL). His take is that Apple has created actual annuities through its different products. Einhorn thinks that the existence of iTunes and Apple's closed software platforms have tied users to the company's different product lines. If this was the case, Apple's strong Free Cash Flow (FCF) would be here to stay. Hence, Apple's 2013 9.8 P/E multiple would be way too low. Backing his words with his money, the founder of Greenlight Capital Management, one of my favorite hedge funds, accumulated a huge position in the company.
Nowadays Mr. Einhorn is trying to push Apple's board to decide on distributing more of its cash. The case he is making is clear to me. Since Apple should generate a FCF of $53 billion this year and over $60 billion the next, the $45 billion of announced distributions seem too low given that the company is sitting on a $137 billion cash pile. He seems to be going the right way. Very recently he had his first victory against a board that was trying to eliminate its own powers to issue preferred shares (shares without voting rights but with a fixed coupon attached to them). Even if sometimes Einhorn seems overly aggressive, I think he is making a very valid point on corporations that hold shareholder's cash without any rational sense. Apple could easily increase its dividend by over $20 billion a year, pay a special one time dividend or issue preferred shares. There is absolutely no sense for any company with such a huge market capitalization and cash generation capabilities to hold so much cash when rates are close to zero. What Apple's board is doing could be understood as value destruction. Apple shares are down more than 15% year-to-date (YTD) to $450. Out of that price $140 is plain cash. There simply no reason for that.
Apple is not alone
Apple is not alone holding cash hostage from investors. Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) are also huge FCF generators with timid (or none at all) payout ratios. Microsoft, already a fully matured company, is learning to give cash back but its taking its time to do so. Microsoft holds over $60 billion in cash and has been making some expensive M&A deals, but at least the company pays a 3.3% cash dividend yield and is growing it by 19% year-over-year. That said, Microsoft has been generating well over $27 billion in FCF and paying out less than $7 billion to its owners. On the other hand we have Google, which in my very own opinion is even more guilty than Apple on its FCF management policy. The company has built a fantastic core business that generates FCF well over $13 billion a year but pays no dividend while holding over $40 billion in cash. Besides, its investment policy is more focused on fulfilling the intellectual curiosities of its founders than on generating actual value for shareholders.
Maybe the time has come when professional investors such as Mr. Einhorn will start pushing these tech giants to pay more cash back to owners. I hope the SEC and all other regulators will keep on supporting investors like they did last week when they supported Greenlight on Apple's case.
Fool blogger Federico Zaldua does not own shares in any of the companies mentioned in this entry. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!