All Companies Should Issue Apple’s iPrefs

moneyIn order to increase the sagging Apple (AAPL) stock price, famed hedge fund investor David Einhorn suggested that the company should issue perpetual cumulative preferred shares. Here is the presentation if you have not seen it. 

The basic idea is that Apple should distribute to its shareholders one of more of $50 denominated iPrefs that pay an annual dividend of $2. The shareholders can either sell them on the open market where Einhorn expects them to trade at around $50 or keep them a get 4% yield per year ($2/$50).

The main reason for the iPrefs over other ways to distribute income (dividends, share buybacks, etc..) is that it will significantly increase the value of Apple’s shares. For example, if Apple issued 10 $50 iPrefs for each share, it would have to pay an annual distribution of $20/share ($2*$10) and theoretically, you could sell the shares for $500. $500 is above todays Apple share price of around $430. If you add the earnings that are left over after the distribution ($20+share and the $137 billion in cash), Apple would probably trade around $250-$300 post distribution.

The more iPrefs Apple distributes, the higher their valuation will be. The iPrefs also have other advantages:

  • There is no default or bankruptcy in the event that Apple cannot pay the dividend.
  • Apple can wait to bring over the cash pile they have overseas and not have to worry about the tax implications.

The iPrefs will definitely unlock value. How much value will depend on two factors:

  • The number of iPrefs they issue.
  • The price they trade on the open market. I think Einhorn is being too optimistic. They will most likely trade at a 5% yield or $40/share. 

The reason the iPrefs will unlock value is that there is discrepancy between what stable high quality companies trade for and where long-term bond yields are at. With iPrefs, Apple is just levering up the company in a smart way and distributing the proceeds to shareholders.

If I was an Apple shareholder (which I’m not), I would continue to hold the shares because as the shares go down, there is a greater chance that they will issue iPrefs. I will most likely start buying the shares at around $400, if they ever get there.

Microsoft

If Apple ever does issue iPrefs, the first company I will buy is Microsoft (MSFT). This will most likely be Einhorn’s next target. It has a similar profile as Apple:

  • Tons of cash on the balance sheet.
  • Trades at less than 10 times earnings and generates tons of cash ever year.

Last quarter, Einhorn increased his stake in Microsoft by over 40% to over 10.8+ million. 

Other companies that could follow suit are other tech giants such as:

  • Cisco
  • Oracle
  • Dell (if the takeover falls through)

Eliminate dividends

I would take it one step further and eliminate dividends and issue iPrefs to take advantage of the aforementioned discrepancy. It would be a big boost to the stock market.

Disclosure: I do not own any of the companies mentioned above.