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.
Which companies will follow Apple?
Apple Inc. (NASDAQ:AAPL) hasn’t been the only company hoarding cash. Microsoft Corporation (NASDAQ:MSFT) has mastered that practice way before Apple did. Mr. Softy 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. It’s worth noting that Microsoft shares have surged 10% in the past 2 weeks on the news that ValuaAct, a activist shareholder fund, took a $2 billion stake in Microsoft Corporation (NASDAQ:MSFT). I firmly believe that things are starting to turn at the company and that future shareholders will be greatly rewarded.
Cisco Systems, Inc. (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 $8.50 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’s 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.
The Fool looks ahead
There’s a wind of change in the air. Apple Inc. (NASDAQ:AAPL)’s move towards larger buybacks and greater dividends marks the beginning of a march by shareholders to try and unlock value from big tech companies. With massive balance sheets filled with cash, I believe that Microsoft Corporation (NASDAQ:MSFT) and Cisco are heading that same path. Invest accordingly.
The article Mr. Einhorn, You Got Your Wish! originally appeared on Fool.com.
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