By Peter Burrows Bloomberg News
SAN FRANCISCO — Apple’s board and management are actively discussing the return of more cash to shareholders and considering a proposal that it issue preferred stock.
Apple shares jumped 3 percent after Thursday’s statement, which followed a call by Greenlight Capital Inc.’s David Einhorn for the maker of iPhones to return more of its $137.1 billion in cash. He had also urged shareholders to vote against a proposal by the company to eliminate preferred stock without investors’ approval.
Thursday’s statement suggests Apple is softening its stance on the preferred shares after saying previously in its annual proxy that it has no plans to issue them. Apple also said that its already committed to returning $45 billion to shareholders over three years.
“Apple needs to distribute some of that cash,” said Erick Maronak, chief investment officer at Victory Capital Management Inc., which owns 370,000 shares of Apple stock.
Apple rose 3 percent to $468.22 at the close in New York, leaving them down 33 percent since reaching a record on Sept. 19.
Greenlight sued to block the proposal to eliminate preferred shares, asking a federal court in Manhattan to bar Apple from certifying votes cast in its favor. Einhorn said he’s been in discussions with Apple’s management, encouraging the company to distribute a high-yielding preferred stock that wouldn’t cost shareholders.
Before, Apple had proposed doing away with so-called blank check preferred stock, which can be issued without shareholder approval.
“The company has not issued shares of preferred stock since 1997,” Apple said in the regulatory filing. “The board does not intend to issue preferred stock in the future.”
Apple said last month that it’s considering an increase in share buybacks and the quarterly dividend. The company reinstated dividends last year.
Einhorn said Apple’s cash hoard equates to about $145 a share, and he joins other investors in saying that the company is hanging on to too much of it.
“Apple must examine all of its options to unlock the growing value of its balance sheet for all shareholders,” Greenlight President Einhorn said in a statement. He said his firm holds more than 1.3 million Apple shares.
He said that preferred shares would be a way to reward investors without putting the company at risk or forcing it to incur taxes on cash brought to the U.S. from overseas.
“Several hundred dollars per share would be unlocked if Apple were to follow through on this suggestion,” Einhorn said in an interview on Bloomberg Television. “It doesn’t put the company at risk. It’s not financial leverage in the sense that debt’s considered to be.”
A company bears more responsibility to pay dividends on preferred stock, potentially benefiting shareholders, said Michael Scanlon, a senior equity analyst at Boston-based John Hancock Asset Management, who said he’s confident that Apple will boost its dividend and increase buybacks.
“I would like more of the cash returned to me,” said Scanlon, whose team oversees $3.5 billion. “If there is something that would expedite it, that would be great.”
Preferred shares could benefit Apple because they don’t dilute management’s ownership of the company.
In its discussions, Greenlight suggested a preferred share distribution, with dividends funded by a small percentage of cash flow, Einhorn said in the statement. He said Apple rejected the idea in September 2012.
Offering preferred shares with a higher dividend would ease some investors’ concerns about Apple’s slowing revenue growth and shrinking margins, Maronak said. That would attract a new class of value investors, replacing growth-focused shareholders exiting the stock.
“Value investors would have a hard time not buying it,” Maronak said.
Maronak said he would prefer Apple to increase the dividend on its common shares. That would be more straightforward than issuing preferred shares, which are often used by troubled companies to ward off unwanted acquisition bids by consolidating voting rights.
“Apple is worth $500 billion. No one is taking it over,” said Brian Barish, president of Denver-based Cambiar Investors. Einhorn is “a smart guy, so I’m assuming he’s got a real plan here. If it’s only about the preferred stock issue, I’d say it’s a strange battle to be fighting,” he said.
The California Public Employees’ Retirement System, which owns 2.35 million Apple shares, said it supports Apple’s proposal to eliminate issuance of preferred stock without shareholder approval.
Separately, Egan-Jones Proxy Services, which advises institutional shareholders on how to vote on corporate proxy initiatives, recommended that shareholders vote against Apple’s preferred-shares proposal.
Apple’s cash balance includes $16.2 billion of cash and $23.7 billion in short-term investments. The rest of the balance is invested in long-term marketable securities.
Greenlight, in its lawsuit, said Apple improperly combined the measure on preferred shares with two other proposals, forcing shareholders to vote to accept or reject all three at once. Greenlight claims the action violates “unbundling rules” issued by the U.S. Securities and Exchange Commission.
Keith Goddard, president of Tulsa, Okla.-based Capital Advisors Inc., said he plans to vote against the proposal and that he too would like Apple to return more cash to shareholders.
“I’m in agreement with the concept that Apple has way too much cash,” said Goddard, whose firm holds 22,925 Apple shares. “As shareholders, our interests are not being served by having 25 percent of the company’s value sitting on the sidelines.”
Lawrence Haverty, a portfolio manager at Gamco Investors Inc., said last month that Apple had left itself vulnerable to lawsuits. Gamco holds Apple stock, according to data compiled by Bloomberg.
“Someone is going to sue them for excessive accumulation of cash,” Haverty said in a late January interview on Bloomberg Radio’s “Surveillance” with Tom Keene.
— With assistance from Karl Baker, Bob Van Voris and Leslie Picker in New York and Tom Giles and Reed Stevenson in San Francisco.