Now That Einhorn's Lawsuit Is Over, What's an Investor to do With Apple?
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In early March, noted hedge fund manager and activist investor David Einhorn withdrew his lawsuit against Apple (NASDAQ: AAPL). To some, it might seem that the quest for Apple to unlock its massive cash hoard was all for naught. Einhorn’s Greenlight Capital, one of Apple’s most famed institutional investors, looks as though it lost its fight and the battle is now over. Might there be more to this story than the news suggests? Or, is the hope for an increased level of shareholder friendliness from Apple truly lost?
What all the noise is about
Einhorn wasn’t the only investor speaking up about Apple’s massive cash hoard. Even the company itself acknowledged that it would take the issue into consideration and weigh the benefits of a revised capital allocation policy. After the additional pressure levied by Einhorn’s lawsuit, Apple Chief Executive Officer Tim Cook pledged to take the issue very seriously. At the company’s annual shareholder meeting, Cook acknowledged investor disappointment and said Apple’s board was looking for ways to reward shareholders.
Indeed, there are some truly staggering numbers in play here. It’s not as if Apple has a few billion in the bank that Einhorn and others are squabbling over. There are shocking amounts of money involved that make this discussion one worth having. After its last quarterly earnings report, Apple revealed it had $137 billion in cash, equivalents and short-term investments on its balance sheet. That’s more than the entire market value of fellow technology stock Intel (NASDAQ: INTC) just sitting on Apple’s books, earning almost nothing for investors.
No clear solution
Speaking of Intel, Apple isn’t the only mega-cap tech stock to have a cash problem. There are a few technology companies with huge amounts of cash and relatively few ways to deploy that cash in a manner than benefits shareholders. One idea could be increased capital expenditures. After all, it’s absolutely critical for technology companies to spend heavily on research and development to ensure their products stay ahead of the prevailing trends. However, that was exactly Intel’s solution to its cash problem, and the market was less than pleased.
In the company’s annual report, Intel announced it would spend $13 billion in capital expenditures in 2013. The market responded with a collective shoulder shrug, and has sent the stock down more than 25% since its 2012 high. Intel has almost $12.5 billion in cash and short-term investments on its balance sheet, up from $10.2 billion one year prior. The stock already rewards shareholders with a hefty dividend yield of greater than 4%, but still the company can’t entice more than a 10 multiple of its trailing diluted earnings per share from the market.
Another technology stalwart, Microsoft (NASDAQ: MSFT), has a similar problem. The frustratingly slow global economic recovery from the 2008-2009 recession means that there are few big growth opportunities for a company like Microsoft. Still, the cash flow continues to build up for Microsoft, which had more than $68 billion in cash, equivalents, and short-term investments on its balance sheet as of its last quarterly report. Consequently, the company's solution to its cash problem was a combination of increased dividends and a big acquisition. Microsoft bought Skype for $8.5 billion in 2011, although it still remains to be seen what if any benefits the acquisition has delivered to the company’s shareholders.
Microsoft was one of the first big-cap tech stocks to embrace the notion of rewarding shareholders with dividend increases. Those dividends have proven to be a saving grace for the company's investors. Microsoft's share price has provided little return for investors over the past several years, so those dividends are crucial. The stock has increased its payout by a compound average growth rate of almost 16% over the last five years, and now yields 3.3%.
Where we go from here
Clearly, what the market really wants to see from these technology stocks is higher growth rates and more pronounced product innovation going forward. Those hopes may or may not materialize, but that’s a separate issue from how to utilize massive cash hoards that are rotting on balance sheets. Apple’s already got that $137 billion in the bank, whether or not its next i-device is a smash hit. Interest rates are at historic lows, and what we know for sure is that massive amounts of cash earning no return isn’t benefiting investors.
I can’t shake the feeling that Einhorn wouldn’t have truly given up without at least an inkling that he’ll eventually get what he wants. Apple instituted its dividend almost one year ago. At the time, the company stated it would revisit its dividend on an annual basis. Consequently, I see a big dividend raise as likely, just on Apple’s terms. With so much cash on the books and more than $42 billion in free cash flow last year, at this point even the company itself understands it doesn't need all that cash on the books. With that in mind, I expect at least a 25% dividend increase by August. At that level, the stock would be yielding more than 3% given recent prices, an enticing yield that many should find difficult to resist.
Robert Ciura owns shares of Apple and Intel. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, Intel, 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!
