Tech Blog

Just for a change, Apple investors are jumpy. After ticking about 1 per cent lower throughout Tuesday morning, Apple stock suddenly leapt in high-volume trading just after lunch to close up 1.4 per cent for the day.

The reason for this latest share-price volatility seems to be a fresh bout of speculation circulating on Twitter about what Apple might announce at Wednesday’s annual shareholder meeting.

The one thing we know for sure is what Apple won’t be doing: holding a planned vote to remove its ability to issue so-called “blank check” preferred stock without shareholder approval. For now, that change is on hold, thanks to Greenlight Capital’s David Einhorn.

The activist shareholder’s legal action – arguing that bundling the vote on issuing “prefs” with other changes to Apple’s articles of incorporation was against SEC rules – succeeded in securing an injunction preventing the vote on “Proposition 2” this week, despite Apple’s protests.

Mr Einhorn’s lawsuit is part of his wider campaign to persuade Apple to issue what he catchily calls “iPrefs”, a new high-yielding class of share. This, in turn, is part of a wider debate about what Apple should do with its $137bn cash hoard – a debate to which Apple itself has so far contributed little.

At the Goldman Sachs tech conference earlier this month, Tim Cook, Apple’s chief executive, said only that the board was discussing “a series of alternatives” and would “seriously consider returning additional cash to our shareholders”.

However, he also said that Apple would not rule out blowing its cash on large acquisitions or simply leaving it where it is, noting that the money was “not burning a hole in our pocket”.

Back then, Mr Cook gave every impression of being a man who would not be rushed into action, but Friday’s court ruling has been seen by some on Wall Street as likely to force his hand. Scott Kessler, analyst at S&P Capital IQ, said in a recent research note:

“We think the court’s decision adds more pressure to Apple in the context of its balance sheet. We continue to expect Apple to be more proactive and aggressive with its cash/investments, perhaps via further repurchase and dividend activity.”

The form of any cash return, however, remains a subject of intense debate. Many see Mr Einhorn’s iPrefs idea as overly complex and unusual.

In a blogpost earlier this month, Aswath Damodaran, professor of finance at New York University, set out several more straightforward options for Apple to increase returns to investors that don’t require so much legal and procedural wrangling as Mr Einhorn’s proposal.

“The simplest and least involved alternative is to increase the common dividends per share from the existing level of $10.60 per share to a higher value,” said Mr Damodaran, who also penned an opinion piece for the FT on investing in Apple earlier this month. Companies rarely cut their dividend, he argued, so this would give Apple’s long-term shareholders much of the reassurance that Mr Einhorn argues they seek.

Whatever the merits of iPrefs, Mr Einhorn has clearly succeeded in reopening the debate about Apple’s cash – and indeed the similar piles mounting at other tech companies. As the FT’s own Lex columnists put it this week:

“Leaving cash in a savings account earning 1 per cent, when its cost of capital is 10 per cent, is absolutely not shareholder friendly and an invitation to bad decisions. That is the kernel of truth in Mr Einhorn’s argument.”

It is almost a year since Apple announced its plan to return $45bn to shareholders over three years, through its first dividends and share buybacks in 17 years.

Since then, Apple’s prolific cash flow has added $40bn to its coffers. Apple’s payout plan, as it stands today, does not actually address the issue of its cash pile: it doesn’t even dent it.

The idea that seemed to get traders excited today was a rumour – percolated at least in part through an oddball tweet by Douglas Kass of Seabreeze Partners – that it would split its stock.

High above the Alps my Gnome is hearing a rumor that Apple will announce a stock split at tomorrow's shareholder meeting.$AAPL

— Douglas Kass (@DougKass) February 26, 2013

Not half an hour later, Mr Kass poured water on his own fire, saying that he was now “paring back” his position in Apple because splitting the stock would – like iPrefs, if Apple has its way – require a shareholder vote.

In any case, Jay Ritter, finance professor at the University of Florida, tells the FT that a stock split would not have any benefits for Apple shareholders.

Splits put no new money into investors’ hands, merely giving them more shares that total the same valuation they had before. In the past, stock splits could superficially affect small, individual shareholders’ sentiment, because Apple stock might seem more accessible at $40 than $400 per share. But the reduced role of individual shareholders and the growth of algorithmic, high-frequency trading renders that point somewhat moot, Prof Ritter says.

That leaves simply hiking the existing dividend as the most likely option, analysts say.

Morgan Stanley estimates that Apple could afford to return an extra $28bn this year, giving a dividend yield of 6 per cent, if it took the S&P IT sector’s average payout of 68 per cent of free cash flow. “[The] high mix of international cash limited flexibility in the past but raising low-interest debt can help address this issue, in our view,” wrote Morgan Stanley analyst Katy Huberty in a note last week.

However, BTIG Research’s Walter Piecyk says only a significant dividend hike would satisfy Apple’s demanding investors:

“If it’s not a dramatic move there could be disappointment in the market. If Apple ‘only’ increased dividends by 40 or 50 per cent, which by any standards would be great news, a cash-focused investor base might be oddly disappointed.”

The more fundamental issue, says Mr Piecyk, is whether Apple can unveil a new product set – whether cheaper iPhone, new TV set or iWatch accessory – that might reinvigorate earnings, which are predicted to be flat for the first half of 2013.

“Investors seem more focused on what Apple will do with their cash than how it plans to return to profit growth,” he says. “If investors saw a more clear path to how the company could return to earnings growth, that could have a far bigger impact on the stock than any increase in dividends.”

Apple’s shareholder meeting starts at 9am in Cupertino, California (5pm London time) on Wednesday. No iPhones or MacBooks (or any other brand of smartphone or laptop) are allowed in the meeting – but the FT will be there to bring you the news.

Additional reporting by Richard Waters