By Serkan Unal
We have written on several occasions in the past that corporate insiders' sales of stock in their own companies may be indicative of an expected drop in the share prices in the near future. Insiders are in the best position to judge whether their businesses are facing any challenges that could lead to stock price declines or whether their stocks are priced above intrinsic values and price levels justified by the stock's fundamentals. Of course, insiders often sell stock in their companies so as to diversify their holdings, to meet option expiration deadlines, or to meet disposition requirements set under the predefined disposition plans. Therefore, investors should try to decipher the nature of insider sales before mimicking their moves.
Recently, there have been several noteworthy insider sales of dividend-paying stocks. Here is a quick glance at five such sales transactions that could indicate a negative insider sentiment.
Energizer Holdings Inc. (ENR), the battery and razors maker, has seen its stock price rally some 33.5% over the past 12 months to the highest level since early 2008. Earlier this year, the company issued an upbeat outlook for 2013, besting analyst expectations at the time. The company reported an increase in fourth-quarter EPS of 7.4% on an adjusted basis, with revenues marginally down. In fact, Hurricane Sandy helped its quarterly performance, boosting battery sales. The outlook for the company is still upbeat, as the company expects to earn between $6.75 and $7.00 per share this fiscal year, an increase of between 8.9% and 12.9% from the year earlier. The expected performance will be driven by the company's diversified product mix, innovative new products, and cost-savings from restructuring. The stock still trades below its industry, at a forward P/E of 14.2x, and appears attractive based on a free cash flow yield of 8.8%. However, the company's stock price is probably reflecting most of the positive near-term catalysts. ENR pays a dividend yield of 1.6% on a payout ratio of 23%.
In March, there were four insider sales transactions and two separate option exercises involving ENR stock. Some 8,000 shares were sold for a total of $788,800, including a 5,000 shares from previously exercised options. One insider, Alan Hoskins (President and CEO of Energizer Household Products) was selling ENR shares outright. Hedge funders Alexander Roeper (Atlantic Investment Management) and Mario Gabelli trimmed their ENR stakes last quarter.
Raytheon Corp. (RTN), a technology company servicing defense, homeland security, and other government markets globally, has been a laggard among stocks in this rally. The reason for the underperformance is the defense cuts and the effect of sequestration on the company's prospects. Despite the noted defense spending cuts, RTN is well-positioned to sustain the headwinds, at least in the near term. Analysts expect it to grow its EPS at a modest CAGR of 5.7% for the next five years. While the company has strong order bookings and order backlog, it is still exposed to risk of order cancellations in case the budget cuts run deeper than forecast. Despite all the adversity, the stock is up 10% over the past year. It currently trades at a forward P/E of 11x, slightly below that of the defense industry. However, while the stock is trading at a price-to-book below its industry's, this ratio presently exceeds the stock's five-year average. RTN pays a dividend yield of 3.7% on a payout ratio of 41%.
On March 25, one of the company's Vice Presidents, Richard Yuse, sold 10,000 shares at an average price per share of $56.90. Just before the end of February, the company's President and CEO, William Swanson, sold a total of 70,745 shares at an average price per share of $54.37. Last quarter, among fund managers, Phill Gross (Adage Capital) was very bullish about the stock.
HollyFrontier Corporation (HFC), an independent petroleum refiner, has seen strong price gains over the past year, rising nearly 58%. The $10-billion company reported a surge in its EPS in the previous quarter on a 3.6% year-over-year gain in revenues. However, while its EPS jumped 81% year-over-year on a large expansion in refining margins, the company still missed analysts' expectations for the quarter, mainly due to after-tax charges on environmental accruals and partial write-offs. The outlook for continued profitability remains rosy. Last month, the company's CEO was reported as saying that the "strength in inland to coastal crude oil differentials continued to contribute to attractive refined product margins," and that, "looking to 2013, we believe that the structural crude advantages currently driving our operating margins will positively impact our operating income, allowing us to continue to pay both regular and special dividends." Interestingly, in early March, shortly after making this announcement, he sold 100,000 shares at an average price of $58.37 per share. The company pays a dividend yield of 2.3% on a payout ratio of only 17%.
In March, including the CEO's sale, there were two insider sale transactions and one purchase of HFC stock. A total of 110,000 shares were sold for a total value of $6.36 million. Another seller was the company's Executive VP and COO, David Lamp, who sold 10,000 shares at $51.86 per share. However, March also recorded one buyer. One of the company's directors, Franklin Myers, purchased 2,000 shares of HFC at $51.28 per share. Last quarter, among hedge funds, both Jim Simons and John Burbank were sellers of this stock, while Point State Capital was a buyer.
Lowe's Companies Inc. (LOW), the second-largest home improvement retailer, has rallied strongly amidst the rebound in the housing market. Its price is up nearly 20% over the past 12 months. The company has seen its revenue and earnings rise last year, and the outlook for continued gains this fiscal year is optimistic. The company is forecasting a 4% increase in total sales this fiscal year, with a 3.5% gain in comparable-store sales. Its EPS will jump 21% in FY2013. The company is also stepping up share repurchases, with a new authorization for the repurchase of up to $5 billion shares. For the reference, in FY2012, LOW repurchased $4.35 billion worth of shares. However, even as the housing market recovery continues, the stock market seems to have already priced in the positive expectations, with LOW now trading at 18.2x its forward earnings, mostly fairly priced and at a small discount to its larger rival. Still, the stock is trading at price-to-book of 3, some 50% above its five-year average. LOW pays a dividend yield of 1.7% on a payout ratio of 31%.
In March, there were three insider sale transactions and two option exercises involving LOW. A total of 197,742 shares was sold, including 84,000 shares from option exercises. Total value of sales was $7.6 million. Among the notable insiders was the company's President and CEO, Robert Niblock, who sold outright some 97,769 shares at an average price of $38.56 per share. Last quarter, among prominent hedge fund managers, Edgar Wachenheim of Greenhaven Associates scaled down his LOW position, the largest in the fund, while Citadel's Ken Griffin was a buyer.
Waddell & Reed Financial Inc. (WDR), an asset manager with a bent toward equity funds, is known for its shareholder-oriented capital deployment strategy. The company raised its dividend 12% back in November 2012 and paid a special $1.00 cash dividend, indicating possibility for additional special dividends in the future. The stock is up 34% over the past year, and is currently trading at 17.2x forward earnings, a premium to its respective industry. As regards its financial performance, WDR beat analyst estimates on bottom line growth in the last quarter of 2012 and the year as a whole. Its top line growth of 4.8% was fair. The company was able to grow its assets under management by a commendable 15.6% last year. Still, at the current price, the stock looks overvalued, even as its EPS has been revised higher over the past three months. WDR pays a dividend yield of 2.6% on a payout ratio of 44%.
Last month, there were four insider sale transactions and one options exercise. A total of 26,136 shares were sold, including 6,371 from the option exercise. Total value of the sales transactions was $1.12 million. Prominent sellers included the company's Chief Investment Officer and President, Michael Avery, who sold 10,000 shares at an average price per share of $42.85. Last quarter, among hedge funders, value investors Ken Fisher and Chuck Royce trimmed their respective positions in WDR.