Should Apple Get Preferred Treatment?

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

Many investors are still reeling about the dramatic drop in Apple (NASDAQ: AAPL) in recent months. Now that quarterly reports of major hedge funds have been released, it is now apparent that many large ones have sold their shares. Whether they have done so due to realizing the stock had become a bubble or was just fueled by momentum is still questionable. However, there are many funds that have added to their positions, most notably infamous short seller David Einhorn. Mr. Einhorn has been a sorcerer in profiting from the predicted fall of companies, e.g. Green Mountain Coffee Roasters (NASDAQ: GMCR). Just the mention of Green Mountain's having a "limited" single cup brewer and its K-cup coffee pods presenting a "looming patent issue" sent the stock down 10% in one day. A few disappointing earnings reports later, and the stock was below 20 last July. Despite the other hedge fund Apple sellers, Mr. Einhorn has disclosed that his Greenlight Capital company has increased their stake in Apple by 45% and now owns a staggering 1.6 million shares. He also owns call options which means he has confidence in a short term big move to the upside.

That such an expert short seller has increased his stake in Apple lends confidence for the bulls. But is Apple a bargain at current prices?  Recently, as many of you have heard, Einhorn is suing Apple to block a proposal that would hinder the company's power to issue preferred stock. I do like the idea of preferred stock and I own several, but for a company like Apple, I don't think they should issue one. A preferred stock usually gives investors more confidence in that it is essentially a hybrid between an equity and a bond instrument. Preferred stock usually carries no voting rights (you know, all those shareholder mailings 90% of you throw away without reading) but dividend payment is higher and has priority distribution over the common stock in the event of a bankruptcy or other downsizing event. I doubt Apple is going bankrupt any time soon.

Just getting Apple to issue a dividend must have required bamboo shoots under the fingernails of the trustee board. Steve Jobs always resisted the idea of a dividend payment so it is no wonder going through the bureaucratic nightmare of issuing another investment vehicle would meet with resistance. A much easier solution I believe Apple should execute is to merely raise the existing dividend. Currently Apple generates roughly $50 billion a year in cash. Instead of hoarding most of it, they could take less than half of that amount and return it in dividends to shareholders and generate close to a 5% yield, slightly above what even Einhorn wants to see in the preferred. By raising the dividend shareholder thunder would be louder than a meteor strike, running the stock back to $500 again quickly, and also some of that distributed capital would flow back in.

I am an avid believer in investing in great dividend paying businesses so I would like to see a dividend increase. But Apple isn't the only tech game in town paying a dividend. Intel (NASDAQ: INTC) has not seen an Apple-like bubble and Apple could learn a few lessons from Intel. As a dividend paying company, they are more generous to shareholders yielding 4.3% vs Apple's paltry 2.3%. Whereas Apple spends nearly nothing on its dividend payout and buys back no shares, Intel has recently spent $12 billion on stock and gave another $4 billion back to its shareholders in dividends. Although Intel is not a growth company, its net operating margin is comparable to Apple (27% vs. 33%). Intel is tremendously cheap here, trading at 5 times vs apple's 7 times earnings before omissions. And as a long term investment, Intel only has to provide the hardware to drive new devices, not keep inventing new glitzy products for gadget hungry techies.

Perhaps Intel has been all but ignored due to its failure to enter the exponentially growing mobile phone market. Indeed, the trillion dollar mobile phone market presents many opportunities in years to come from the hardware standpoint to power the increasingly sophisticated mobile apps. For example, an exciting new app has been released that actually pays you just by using its informative content. A great business like Intel didn't get to grow into an 800 lb. gorilla by ignoring current trends, but by capitalizing on them. So you can rest assured that Intel is planning something in the mobile phone department, and they won't disappoint. 

So I think investors should take a more serious look at Intel long term and avoid Apple and the preferred stock hype for the near future. As for Einhorn, stay out of the way of great businesses, withdraw your lawsuit and go back to doing what you do best.

Sabatuj has no positions in the stocks mentioned in this article but is looking to sell puts on Intel and Apple soon. The Motley Fool recommends Apple, Green Mountain Coffee Roasters, and Intel. The Motley Fool owns shares of Apple and Intel. 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!

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