KB Home’s (NYSE:KBH) third-quarter results highlighted a capital-allocation trade-off between share buybacks below book value, higher leverage and a lower cash balance.
Aggressive Buyback Strategy Ahead Amid Cash Flow Concerns
The company bought back about 890,000 shares for $50 million during the third quarter, executing the transactions at an average price of around $56 apiece, which was below the company’s book value per share of over $62.
Executive Chairman Jeff Mezger noted on the company’s earnings call that over the past five years KB returned over $2.1 billion in total capital to shareholders from stock buybacks and quarterly dividends, and reduced its share count by more than a third.
However, the company’s aggressive stance on stock repurchases saw pushback from analyst Alan Ratner from Zelman & Associates, who noted that KB is planning to spend over $300 million this year on buybacks and dividends is outrunning free cash flow and leverage is back at around 30%.
Mezger responded by noting that land spend should come down. “So we took the cash from the build times coming down, and we put some of it to repurchases,” he said, adding that the company’s acquisition and development have been going up the last two years.
Value or Trap Debate Continues?
KB’s debt-to-capital ratio rose to 35.7% at the end of the third quarter, compared to 33.2% in the year-ago period. The company’s liquidity was about $942 million, including $783 million available under its unsecured credit facility, with $415 million already drawn. Meanwhile, by quarter-end KB had only $159 million in cash.
KB Home’s management views the below-book-value repurchases as an attractive use of cash, saying they are accretive to earnings and book value per share and can improve return on equity over time. But they also reduce cash available for other uses at a time when leverage has increased.
If housing conditions deteriorate further, the lower cash balance and higher debt-to-capital ratio could reduce financial flexibility.
Price Action: KB Home shares closed 2% lower at $46.47 a piece on Wednesday, while year-to-date the stock has tumbled about 17.62%.
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