But Mr. Einhorn, What About Microsoft?
Shmulik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On February 7, David Einhorn, the famous hedgie from Greenlight Capital, published a pressing letter to Apple (NASDAQ: AAPL) shareholders. In this letter, he urged shareholders to resist the company's attempt to eliminate preferred stock from its charter. According to Einhorn, an Apple shareholder since 2010, the iconic company could unlock tremendous value from its balance sheet by issuing high yielding preferred stock to its current shareholders.
The underlying rational
The basic rational underlying this interesting initiative is the ultra-conservative balance sheet of Apple. As of this writing, the company has a cash mountain in the amount of $137 billion (and growing..), or $145 per share. At a share price of $470, it means that 30% of a share's price is pure cash. In other words, that's idle money sitting in the bank earning measly rate of interest instead of being deployed efficiently by management. He urges that although the company commenced to pay a dividend in 2012, it's by far too little and too late. Much more could be done in the capital allocation front. The safest place for the company's excessive cash is the shareholder's pocket.
Cash is king: Not only for Apple
Accumulating mountains of cash on the balance sheet has been a favorite practice lately. Many cash- gushing companies, fearful of a 2008 replay, simply prefer to stay on the safe side with their mountains of cash. Below is a list of mega tech companies with growing loads of cash only waiting to be returned to the hands of shareholders:
- Microsoft (NASDAQ: MSFT) is the ultimate leader of this cash collecting practice. Microsoft currently maintains $68 billion on its balance sheet, or $8.13 per share. Similarly to Apple, 30% of the share price of Mr. Softy consists of pure idle cash. Differently from Apple, Microsoft is a mature company with a virtual monopoly in its field of server and operating systems. Apple's products, as iconic as they may be, could be duplicated, outdated or easily fall out of fashion with their users. In addition, Microsoft has raised its annual dividend at an impressive rate of 15% per annum, currently at 3.5%. The same could hardly be said for Apple.
- Cisco Systems (NASDAQ: CSCO), the provider of plumbing services for the Internet is another cash-gushing monster. Cisco currently has $45 billion of cash on its balance sheet, or $8.5 cash per share, a whopping 40% of its share price. The company grows its earnings at an annual clip of 17% with a gross operating margin of 23% which explains perhaps why it is able to accumulate so much cash, so fast. With a relatively modest dividend yield of 2.5%, Cisco's annual dividend definitely has some room to grow. It should.
- Oracle (NYSE: ORCL) is the third peer in this respectable group. The manufacturer of software for databases is sitting on $34 billion of cash, or $7 per share. On the one hand, Oracle is not an extreme example as Apple - 'Only' 20% of its share price is pure cash compared to over 30% in Apple. On the other hand though, Oracle seems to deploy its capital much more poorly than Apple. It's always on a buying spree for expensive companies, it barely pays any dividend (a measly dividend yield of 0.7%) and it issues new shares at a staggering rate. Oracle practically begs for someone like Einhorn to act as the responsible adult around and transfer more of its cash to shareholders.
The Fool looks ahead
It's still fairly early to say whether Einhorn's initiative will spark a vast cry against other companies to start returning more cash to their shareholders in the form of dividends. But I certainly believe that this move towards unlocking value via dividends is a blessed initiative to corporate America.
shmulikarpf owns shares of Microsoft. The Motley Fool recommends Apple and Cisco Systems. The Motley Fool owns shares of Apple, Microsoft, and Oracle.. 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!