Apple CEO to face investors seeking more of $137.1 billion hoard

February 26, 2013 10:12 AM

As Apple Inc. Chief Executive Officer Tim Cook takes the stage at this year’s shareholder meeting, he may not get the reception he received in 2012, when investors lauded the company’s performance and rising shares.

The annual event, where holders will vote on re-electing board members, takes place tomorrow at Apple’s headquarters in Cupertino, California. In this year’s run-up, the company has been enmeshed in a public spat over distribution of its $137.1 billion in cash and investments with hedge-fund manager David Einhorn, who advocates a bigger payout, using preferred shares.

After a five-year rally following the iPhone’s 2007 debut, the stock has fallen 37 percent from a September peak and 14 percent since last year’s gathering. Slowing sales and profit gains have increased pressure on the company to introduce new products that can reignite growth, setting the stage for a higher degree of confrontation this time.

“Investors over the past few years have seen the stock only going up during a series of very successful product introductions,” said Michael Obuchowski, a portfolio manager at North Shore Asset Management LLC, which owns Apple shares. “Now there are a lot of questions being raised about Apple’s future, and with good reason.”

A central criticism among shareholders is the money accumulated by Apple, the world’s most valuable company by market capitalization. Investors want a bigger slice of the cash hoard that has grown over a half decade amid surging sales of iPhones and iPads.

Jobs Contrast

Shareholders have found a more receptive audience in Cook, who took over as CEO in 2011 from co-founder Steve Jobs. While Jobs long dismissed investors’ cash demands, Cook reinstated the company’s quarterly dividend and unveiled a $10 billion stock buyback program last year.

That wasn’t enough for some shareholders. The tension has built in the weeks leading up to the investor meeting, after Greenlight Capital Inc. founder Einhorn sued Apple as part of a push to get the company to create a new class of dividend-paying preferred stock. A judge sided with Einhorn in a ruling last week, prompting Apple to scrap a proxy proposal that would have required the computer maker to get shareholder approval before issuing such a new category of shares.

Jonathan Gasthalter, an outside spokesman for Greenlight, didn’t immediately return a call seeking comment on Einhorn and whether he plans to attend the meeting.

Steve Dowling, a spokesman for Apple, declined to comment on expectations for the meeting.

Message Sent

Even investors who don’t support Einhorn’s plan for the new type of stock applaud his tactics, saying they have sent a message to Apple’s management about returning money to shareholders.

“It took a pretty extreme action to get the company’s attention,” said Keith Goddard, president of Capital Advisors Inc., which owns Apple shares. Goddard said he supported the lawsuit, and that he prefers buybacks and higher dividends.

The tussle between Apple and its shareholders heralds a new era for Apple, in which investors who have seen the stock drop in recent months won’t be as patient with the company as they were when it was performing well.

“Apple could get away with saying very little to investors when it had the mystique of Steve Jobs and it was coming out with great products,” said Kathleen M. Wailes, a senior vice president at Levick, an investor-relations firm in Washington. “But with the stock falling, more are going to want cash if they are going to maintain their positions.”

Investors’ Questions

Cook and other executives will take questions from investors at the meeting. The CEO has defended the company’s policies, saying that it is handling cash responsibly to invest in operations, while acknowledging the company has money to spare. The board is exploring different options, including boosting dividends and buybacks and issuing preferred shares.

At the shareholder meeting, investors will vote to reelect the company’s slate of directors. It includes Cook; Chairman Art Levinson; former Avon Products Inc. CEO Andrea Jung; former U.S. Vice President Al Gore; J. Crew Group Inc. CEO Mickey Drexler; former Intuit Inc. CEO Bill Campbell; former Northrop Grumman Corp. CEO Ron Sugar; and Walt Disney Co. CEO Bob Iger. All the board members are scheduled to attend the meeting.

Apple also has asked shareholders to make an “advisory vote” on the company’s executive compensation. The measure is non-binding, so even if majority of shareholders vote against the pay structure, Apple wouldn’t be required to change it.

Holding Stock

Another measure offered by a shareholder would require executives to hold more company stock -- to ensure that their interests are better aligned with those of investors. Apple defends its existing structure, which includes salary, bonus and shares that vest over time. The company says that arrangement keeps management focused on performance over the long haul.

In the face of recent criticism, some investors want to see Cook address investor issues more assertively, said Walter Price, managing director at RCM Capital Management. IPhone sales are slowing as the smartphone market becomes increasingly saturated, and Apple needs to show that it can appeal to customers in developing countries where Samsung Electronics Co. has excelled with less-expensive models, Price said.

Some investors are holding Apple to unrealistically high expectations, given its past successes, Obuchowski said. Apple’s fiscal first-quarter results represented one of the best quarters the technology industry has ever seen. Still, the numbers, released last month, fell short of some analysts’ projections.

Growth Slows

There’s evidence that growth is decelerating. Apple forecast that second-quarter revenue would increase less than 10 percent, the slowest rate since 2009. Rivals such as Google Inc., Samsung and Inc. are introducing compelling new products to challenge Apple’s stronghold in smartphones and tablets, Obuchowski said.

Some investors are abandoning the stock after a lucrative run and while they wait to see what new products Apple will introduce, he said. In the meantime, a bigger dividend or creation of new class of preferred shares may be necessary to hang on to investors who haven’t given up yet.

“They are at a point where investors are questioning what the future of Apple is,” Obuchowski said.

Bloomberg News

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