AAPL: Einhorn’s Right, Major Capital Allocation Change Needed, Says Bernstein

Toni Sacconaghi of Bernstein Research, who has an Outperform rating on Apple (AAPL) shares, was on CNBC briefly a short while ago to discuss the interview earlier this morning�with David Einhorn�of Greenlight Capital�who is agitating to have shareholders reject Apple’s proxy vote on blocking preferred shares.

Einhorn thinks Apple needs to issue perpetual preferred shares with a 4% dividend yield to close the enormous valuation gap he sees in Apple.

Sacconaghi was inclined to agree with Einhorn, though he actually thinks the company should take on large amounts of debt:

Look, like any set of calculations, Einhorn’s idea is based on a series of assumptions, and we could bicker with some of them. The broader issue that Einhorn is bringing to the table, and it’s one Bill Miller raised yesterday, is that Apple investors are dissatisfied with Apple’s capital allocation strategy. I fully agree with those views. Others have suggested, and I believe, Apple should take on debt and raise its dividend. The fact is, for a company to have $137 billion and add $40 billion per year, is destroying economic value. The important thing is, Apple is actively talking with major shareholders now about returning incremental cash. They did this a year ago. After that they announced the initial dividend last march. They are now going through a similar process. I don’t think that means anything, but there is a precedent, at least, here. So first and foremost, they are looking at this. The majority of the cash, $85 billion, is off shore. So, to return that cash, they are going to have to pay a tax. The alternative is to take on debt. They don’t want to take on debt, and they don’t want to pay a tax, is the issue.

Asked by the hosts if he was surprised that Apple wants to take away the possibility of preferred shares from its charter, Sacconaghi responded,

It’s hard to say where that notion came from and why Apple wants to eliminate it. In many cases, shareholders actually do want the preferred stock provisions eliminated, because they can be used to avert a takeover. But given Apple’s market cap, they are not going to be taken over. The real reason behind why Apple is proposing to have prop 2 eliminated is not clear at this point.

Sacconaghi said the biggest catalyst to get Apple shares going at this point would be “a major return in cash” to shareholders. “If they raise the dividend 15%, it’s not going to move the stock. They need a major change in capital allocation.”

But will it happen?

I’m not holding my breath on that. Then again, Apple is a company that never returned any money to shareholders, and they took a step a year ago. I’m not betting on significant change in policy in next few months.�To get value investors to own this stock to really move it, you need a dividend in the high 3% range, ideally you need a dividend in the 4% plus range.

Apple stock is up $1.30, at $456.