INVESTING
Hands Off My Dividends!
iStar Financial has been a steady market beater over the past five years, combining substantial long-term capital gains and a compelling dividend yield. But after recommending the stock to subscribers, Fool analyst Mathew Emmert has considered jumping off the iStar ship. The reason? Greedy executives.
By Tim Hanson (TMF Mmbop)
August 29, 2005
Jay Sugarman, CEO of iStar Financial (NYSE: SFI), earned nearly $33 million last year -- the beneficiary of a 1,500% raise that was tops among all publicly traded companies. According to Forbes, that makes him the world's 35th best-compensated executive -- and his company is not even one of the 500 largest according to market cap.
From the trial of former Tyco (NYSE: TYC) CEO Dennis Kozlowski to Eliot Spitzer's chase of Dick Grasso, we've heard a lot about excessive compensation lately. But don't get me wrong. I believe strongly in the free market, and I support the notion that superior performance should be rewarded. Running a large, public company is hard work, so I'm not usually upset by CEO salaries. But iStar's case sticks out for two reasons:
The compensation is out of line with achievement.
The compensation is substantially limiting shareholder returns by reducing the funds available to distribute through dividends.
Money from my pocket
Richly rewarded CEOs are nothing new. Wells Fargo's (NYSE: WFC) Richard Kovacevich made $53 million in 2004 to lead his company during a very average year, and Irwin Jacobs earned $44 million to do about the same for Qualcomm (Nasdaq: QCOM). And although their compensation affected shareholders, it didn't quite do so as directly as the plan at iStar.
That's because iStar Financial is a real estate investment trust (REIT). Good REITs are normally great buys for market-beating dividend investors because law requires that REITs pay out at least 90% of earnings to shareholders. REIT investors directly benefit from company performance through hefty dividends, particularly if they reinvest their dividends and hold shares in a tax-sheltered account.
But excessive executive compensation substantially limits shareholders' profit participation, and that is exactly what iStar is doing by allowing a slew of additional managers to participate in its High Performance Unit (HPU) plan.
The face of iStar
For a while, Sugarman's compensation was the only real problem. But with more managers now participating, the company is flat-out taking money from shareholders' pockets and distributing it directly to employees. Shareholders could see their profit participation reduced by some 30% because of this change. Compare that to some other market-beating REITs:
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