San Francisco, CA -- Apple came under siege Thursday by an influential institutional investor seeking to unlock its massive $137 billion cash war chest's dividend potential, in growing signs of such unrest and shareholder angst with the company's poor stock market performance of late.
Billionaire hedge fund manager David Einhorn of Greenlight Capital is agitating for investor action and has filed a lawsuit in plans to oppose a proposal concerning its cash pile, scheduled to come up for a shareholder vote on Feb. 27.
In a sternly worded letter, well-known short-seller Einhorn is calling on shareholders to vote down the proposal on Apple's proxy that would make it more difficult for the company to issue preferred stock. Issuing preferred stock (shares of stock that often carry a large dividend yield) is a popular way for many cash-rich companies to return money to shareholders.
"Apple should unlock shareholder value through the distribution of perpetual preferred stock," Einhorn said in a Securities and Exchange Commission filing.
Activist shareholder action and growing scrutiny of its business underline an increasing status change of Apple as a value stock, vs. a growth one in the eyes of investors.
"It's very odd that Apple is just sitting on all this cash when it's clear that its growth has slowed down," says Richard Sloan, an accounting professor at the University of California, Berkeley. "Value investors are thinking more about distributing free cash flow."
Shares of Apple, once the momentum stock darling of Wall Street, as investors thought it could do no wrong, have been crashing amid questions about the company's stalling innovation and growth. Apple stock has shaved off more than a third of its value from its more than $700-a-share high in a few months.
"Part of the reason the stock has performed so poorly is growth has slowed and investors have hit the eject button," says Bernstein Research analyst Toni Sacconaghi.
Dividend activism is likely to stick Apple CEO Tim Cook in the hot seat next week at an expected appearance at a Morgan Stanley investor conference.
Apple issued a statement saying management and the board "have been in active discussions about returning additional cash to shareholders," and it will "thoroughly evaluate Greenlight Capital's current proposal to issue some form of preferred stock."
Shares of Apple closed up 3%, at $468.22, following the statement.
"I think the stock moved in optimism that Apple is examining this issue -- they are clearly serious about examining the return of cash, and that's good," says Sacconaghi.
Greenlight has also filed a lawsuit in the U.S. Federal District Court for the Southern District of New York, seeking to have Apple unbundle the various components of the proposal so that shareholders can vote on each individual provision "as mandated by SEC rules," according to the hedge fund's SEC statement. Einhorn's Greenlight holds 1.3 million shares of Apple.
On Apple's side, CalPERS, or the California Public Employees' Retirement System, issued a statement saying Apple's proposal deserves full support.
Einhorn is best-known for publicly criticizing the business practices at Lehman Bros. in 2007 before the stock collapsed. Einhorn bet against the stock, and the company filed for bankruptcy protection in 2008.
At an investment conference in May 2012, Einhorn described a plan in which preferred stock could be used to return hundreds of millions of dollars of cash to shareholders.
Einhorn suggests Apple could issue preferred stock paying a 4% dividend and allow the company to unlock $30 billion in value to shareholders. He also suggests that investors might be willing to pay a higher premium for the shares if the company were to issue preferred stock.
Investors have been increasingly impatient for Apple to stop hoarding its massive cash pile. A vast majority of it is invested in low-yielding investments, including Treasuries. Investors are eager to get that cash back so they can invest it and get a better return. Apple announced its first dividend and buybacks last year after increased investor pressures.