Apple Inc. (AAPL): Einhorn Got What He Wanted

Apple Inc. (NASDAQ:AAPL) has long been criticized for the $150 billion pile of cash on its balance sheet. Shareholders – including hedge-fund billionaire David Einhorn – want Apple to return more of that capital to investors. On February 7, David Einhorn, the famous hedgie from Greenlight Capital, published  a pressing letter to Apple Inc. (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 Inc. (NASDAQ:AAPL) shareholder since 2010, the iconic company could unlock tremendous value from its balance sheet by giving out more cash back to the hands of its shareholders.

Well, Einhorn just got his wish. Some of it at least.

What Apple will do for you (and what it won’t)

Apple Inc. (NASDAQ:AAPL) has no intention to issue preferred stock. But that doesn’t mean that it’s going to sit on its hands and do nothing. In its latest annual conference call, the company announced it would increase its share-repurchase program from $10 billion to $60 billion. It would also increase its quarterly dividend by 15% from $2.65 a share to $3.05 a share. The company now spends around $11 billion a year on dividends, making it one of the largest gross dividend-payers in the country.

Einhorn’s fund, Greenlight Capital, was pleased with the announcement. A spokesperson for the fund said the following in a statement.

“We applaud Apple’s decision to borrow money and return excess capital to shareholders, an idea that was off the table only months ago. This positive development represents a more shareholder-friendly capital allocation policy and demonstrates the conviction of Apple’s management and board in the company’s future.”

A Well-timed move

I believe that Apple Inc. (NASDAQ:AAPL)’s move is very smart and comes at an excellent timing. It’s smart because it transfers a very clear message to investors – We aren’t a growth story any more, so stop perceiving us as such. We have turned into a mature company, and a lucrative mature company pays hefty dividends to its patient shareholders. It is a well – timed move because the best time to initiate a massive buyback program is when shares are trading on the cheap. Today, Apple’s P/E and price/sales are 9x and 2.3x, respectively. That’s very cheap especially for a mature company with a 3% div. yield. Also, Apple Inc. (NASDAQ:AAPL)’s enterprise value (market cap minus cash plus debt) is about $250 billion. At today’s price, the company is trading for around five times enterprise value to its earnings before interest, taxes, depreciation, and amortization (EBITDA). Fellow big tech companies Microsoft Corporation (NASDAQ:MSFT) and Intel trade at P/Es of 10.5x and 11.5, respectively. In addition, both giants trade for a slightly higher EV/EBITDA ratio than Apple. In other words, Apple Inc. (NASDAQ:AAPL) shares are extremely cheap, relatively to other peers and on an absolute basis.