David Einhorn Was Right About Apple

NEW YORK (TheStreet) -- It's official, David Einhorn of hedge fund Greenlight Capital Management was right to set off a debate about Apple's growing cash stockpile in late 2012 and early 2013. That may prove helpful as others like Carl Icahn take a more prominent role in challenging Apple's capital planning.

For those who may have forgotten, Einhorn emerged as Apple's most vocal investor in criticizing the company's capital structure after it unveiled a three-year $45 billion plan to return cash to investors by way of dividends and share buybacks.

Less than two years later, the company's total domestic and international cash stockpile has increased by about $48 billion. That comes as the iPhone and iPad maker has also returned $43 billion in cash to shareholders through dividends and share repurchases.

If Apple had stuck with its initial plan to send $45 billion back to shareholders, the program would be nearly complete and an almost unprecedented flood of cash would be poised to gush into the company's bank account over the next few quarters.

After all, Apple generated $22.7 billion in cash flow from operations and a net profit of $13 billion in the first quarter alone.

Thankfully for Apple shareholders, a year later the company decided to more than double its capital return, upping the three-year capital return plan to $100 billion after a public spat with Einhorn and Greenlight Capital. Einhorn labeled his plan an "iPref" and advised the company to finance its stock buyback and dividend activity.

Still, the pace of Apple's buyback and dividend activity may remain insufficient for shareholders. Apple, for its part, celebrated the amount of cash it has returned to investors on Monday.

"We generated $22.7 billion in cash flow from operations and returned an additional $7.7 billion in cash to shareholders through dividends and share repurchases during the December quarter, bringing cumulative payments under our capital return program to over $43 billion," the company's CFO Peter Oppenheimer said in a statement. 

A filing with the Securities and Exchange Commission indicated that Apple paid out $2.7 billion in dividends and repurchased $5 billion in shares in its fiscal first quarter. The company also maintained its quarterly dividend at $3.05 a share.

While Einhorn applauded Apple's increased shareholder return and particularly the company's willingness to do so through a record $17 billion debt financing, other large investors such as Carl Icahn feel the $100 billion plan may not be enough.

That Apple was able to return its initial three-year plan to investors in about seven quarters indicates that the company's capital planning may remain too cautious.

"Apple's existing capital return program has just $37 billion remaining, and the company has until the end of 2015 to complete it. Without any changes to the program, the largest pile of corporate cash in the world is likely to grow even larger, and if the share price rises, this Board will have missed a great opportunity to use more of that hoarded cash to repurchase shares at an attractive value," Carl Icahn said in a recent letter to Apple shareholders.

Icahn believes Apple should conduct $50 billion in share repurchases in 2014, using spongy debt markets to finance much of those proceeds.

"Given that the company has $130 billion of net cash and $40 billion of expected annual earnings, and the fact that it is hard to find a better time in history to borrow money, a $50 billion share repurchase over the course of fiscal year 2014 seems more than reasonable to us," Icahn said in a shareholder proposal.

While Icahn may not gain the support of a majority of Apple shareholders, the company's earnings momentum and its stagnant share price may indicate necessary change. Icahn said in his letter to shareholders his holding in Apple shares has grown to $3.6 billion.

The billionaire activist also said he would be willing to invest in Apple's shares even if it didn't release new products, an expression of confidence that the company's earnings and cash flow streams aren't likely to be disrupted by competitors such as Google (GOOG) and Samsung

In the first quarter of 2014, Apple sold 51 million iPhones, a rise from the 47.8 million units the company sold in the year ago quarter. The Tim Cook-run company also sold 26 million iPads and 4.8 million Macs during the quarter.

Overall, the company reported $14.50 in quarterly earnings per share on $57.5 billion in revenue. Both figures indicated that Apple has returned to growth after a string of successive quarters in which revenue fell year-over-year. Analysts surveyed by Thomson Reuters expected Apple to earn $14.07 per share on $57.45 billion in revenue.

For the fiscal second-quarter, Apple said it expects revenue between $42 billion and $44 billion, with margins between 37% and 38%, and operating expenses between $4.3 billion and $4.4 billion, with a 26.2% tax rate.

"We are really happy with our record iPhone and iPad sales, the strong performance of our Mac products and the continued growth of iTunes, Software and Services," Tim Cook, Apple's CEO, said in a statement.

Apple shares were falling over 8% to $504.25 a share in after-hours trading. In that sense, maybe it is good that the company has been slow to act on Icahn's buyback proposal.

More from Mergers and Acquisitions

10 Questions for PayPal Ahead of Its Big Investor Day

10 Questions for PayPal Ahead of Its Big Investor Day

Congress May Have Just Set in Motion a Huge Banking Industry Merger Wave

Congress May Have Just Set in Motion a Huge Banking Industry Merger Wave

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Attention 60 Minutes: Google Isn't the Only Big-Tech Monopoly

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Square Shares Shake Off Concerns About PayPal's Deal for iZettle

Square Shares Shake Off Concerns About PayPal's Deal for iZettle