Buybacks Aren't Always a Good Thing
shareholders of NVR Inc., a large home builder and mortgage lender,
have grumbled about the compensation of Dwight C. Schar, its chief
executive. Sure, he made $94 million in 2002, mostly by exercising
options. But stockholders have become rich alongside Mr. Schar, who
bought an interest in the Washington Redskins last year.
closer look at NVR, however, indicates that management's rewards may
come at a higher cost than shareholders may realize.
many other home builders, NVR has dazzled as interest rates have
dropped. In the last two years, the stock has more than doubled; it
closed Friday at $440.
decline in interest rates is not all that's driving NVR. So is the
company's aggressive share buyback plan.
1993, when the company that would become NVR exited bankruptcy
proceedings, NVR has acquired 16.4 million shares for $900 million.
Shares outstanding fell to 7.1 million last October from 12.1 million
stock soared, so did NVR's buyback costs. In 2002, when the company
generated $381 million in net cash from operations, it paid $400
million to buy back shares. And in the first three quarters of 2003,
cash from operations totaled $280 million while $240 million was spent
determined is NVR to repurchase its stock that in 2001 and 2002 it
paid $7 million in so-called consent fees to get debt holders'
permission to buy more shares than its bond covenants allowed.
Interestingly, NVR did not deduct this $7 million as a cost when it
was paid; rather, it was amortized over the years that the debt will
be outstanding, reducing any earnings hit.
Shareholders benefit from NVR's buybacks, of course, because they put
a floor on the stock and even propel it. But Carol Bowie, director of
governance research services at the Investor Responsibility Research
Center, says investors are growing more suspicious of buybacks because
they can mask big transfers of shareholder wealth to managers.
buybacks enrich its executives two ways. First, when executives sell
shares, buybacks using shareholder funds relieve selling pressure on
the stock's stunning rise, it is no surprise that insider selling at
NVR has been torrid. Through the first nine months of 2003, as the
company bought 644,000 shares, insiders sold around 563,000 shares.
From May to November, Mr. Schar reduced his liquid holdings by around
40 percent. William J. Inman, president of NVR Mortgage Finance Inc.,
sold half of his liquid holdings, and Paul C. Saville, chief financial
officer of NVR Inc., cut his stake by 27 percent.
buybacks also bolster Mr. Schar's compensation because some of his
incentive pay is based on earnings-per-share growth.
compensation were based on aggregate earnings growth, NVR's buybacks
would have little effect on his pay. But the buybacks have cut NVR's
shares outstanding, increasing earnings per share greatly.
first nine months of 2003, for example, NVR's earnings rose 16
percent. But on a per-share basis, they jumped 23 percent.
insiders have been selling a lot of stock and the company has been
buying a lot of stock, that presents the potential for conflict of
interest,'' said Paul Hodgson, senior research associate at the
Corporate Library, a governance research company in Portland, Me. ''I
don't think it is a particularly good use of net cash flow, and
neither does it seem particularly wise to choose a long-term
performance target that could be so influenced by management
spokesman for NVR declined to comment. To be sure, its shareholders
have not protested. Maybe they should start.
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