What Should Apple Do With All That Cash?

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

David Einhorn of Greenlight Capital is going after the iconic tech company Apple (NASDAQ: AAPL) and pressuring them to do something with their huge cash pile, now at $137 billion and growing. 

He said "They've done so well that they've ended up with a stockpile of cash that exceeds the market capitalization of all but 17 companies in the S&P 500." 

He proposes that Apple use about $47 billion of the cash and create a new class of preferred stock, called "iPref, which would be priced at $50 per share and pay a $0.50 quarterly dividend. Apple pays $2.65 per share every three months on its common stock right now. Mr. Einhorn filed a lawsuit, and a federal judge ruled in his favor late on Feb. 22 which could clear the way for a shareholder vote on preferred shares.

Apple CEO Tim Cook has called all the talk about the excess cash a "sideshow" and is a distraction for the company. Things could get interesting at the Apple annual shareholders meeting on Feb. 27. 

Mr. Einhorn stated that Apple should follow the lead of other companies which routinely return cash to shareholders.

One such company is International Business Machines (NYSE: IBM). IBM has spent about $100 billion over the last decade or so on stock buybacks, reducing the number of outstanding shares by 1/3 and it has grown its dividend by over 400%. The result has been a 6-fold increase in EPS and a tripling of the stock price in spite of relatively flat revenue growth. 

<img src="http://media.ycharts.com/charts/eb1040a842df939a2b937cdc61fb79c2.png" />

IBM Total Return Price data by YCharts

Another company that has made effective use of its cash position is McDonald's (NYSE: MCD). The maker of Happy Meals and Big Macs now has 20% less shares and EPS has grown by 7 times over the past ten years. The company has nearly doubled its dividend and the total stock price return has been over 400%. McDonald's revenue, although slowing down slightly over the last year or so, has increased at a brisk 5.3% compounded annual rate since 2003. 

 

<img src="http://media.ycharts.com/charts/9f86c476edc3531a46d24755d9087f89.png" />

MCD Shares Outstanding data by YCharts

The conglomerate United Technologies Corp. (NYSE: UTX) has only reduced the number of shares by 2.3%, but it has increased its dividend at a healthy 14.8% average annual rate since 2003. This has lead to EPS growing by 150% and the stock price increasing by 280%. The company, a member of the Dow Industrials since the 1930's, has announced it plans to increase the pace of stock buybacks this year after taking a break in 2012 in order to fund its acquisition of the former Goodrich, which was undertaken in a bid to capitalize on projected growth in the aerospace market over the rest of the decade. 

<img src="http://media.ycharts.com/charts/28bbb651bc09904870075aa926beb75b.png" />

UTX Revenue TTM data by YCharts

Wal-Mart Stores (NYSE: WMT) also has a long history of returning cash to shareholders in the form of buybacks and dividend hikes. In fact, the low-cost retailer just announced an 18% increase in its dividend in its last quarterly statement.

The company has reduced share count by 1/4 and raised its dividend by over 340% in the last ten years. Earnings and revenues have also significantly increased. Wal-Mart has stated that sales might be flat in the short-term based upon the aftermath of the "fiscal cliff" and a jump in gasoline prices. The typical shopper has less cash on hand due to an increase in the payroll tax and a delay in tax processing by the IRS.

<img src="http://media.ycharts.com/charts/ab0334aacd3c4c0673abd2c39357bbbe.png" />

WMT Total Return Price data by YCharts

So it looks like Apple will have to deal with Mr. Einhorn and shareholders may get to vote on his proposal to issue iPref stock as a means to return value to shareholders. Based upon the experience of some other big companies it might not be such a bad thing.

 

 


Mathman6577 owns shares of Apple, International Business Machines., McDonald's, and United Technologies. He is currently an employee of United Technologies. The Motley Fool recommends Apple and McDonald's. The Motley Fool owns shares of Apple, International Business Machines., and McDonald's. 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!

blog comments powered by Disqus