by Serkan Unal
Sifting through insider purchase transactions in search of stocks with upside potential can be a sound investing strategy. This is according to research that suggests mimicking insider purchases can generate alpha over time relative to market indices. The strategy is based on the assumption that insiders have an intimate knowledge of their own companies and industries, and are thus better able to judge when it may be a good time to buy stock in their own companies.
The following represents a selection of three dividend-paying stocks yielding above 2.0% with recent meaningful insider buying. Among the stocks, Kohl's Corp. (NYSE:KSS), a department store operator, represents a good value play, but due to a negative momentum in its operational environment the stock could trade at better entry points in the near future. Macquarie Infrastructure Company LLC (NYSE:MIC), a high-yield owner of infrastructure businesses ranging from airport infrastructure services to bulk liquid storage terminals is a good income and dividend growth stock. Agree Realty (NYSE:ADC), a single-tenant net lease retail properties REIT, is a solid income play.
Kohl's Corp. pays a dividend yield of 3.0% on a payout ratio of 32% of its current-year EPS estimate. The company initiated its dividend in 2011 at 25 cents per share. Its current payout is 40% higher than the initial dividend. Recently, Kohl's Corp. has been struggling with falling sales and inventory buildup. In particular, the company has been losing sales to more fashionable off-price apparel and home fashions retailers such as The TJX Companies (NYSE:TJX).
Moreover, Kohl's has been unable to win customers from its flagging rival J. C. Penney (NYSE:JCP), and may now be pressured to pursue promotions and aggressive price cuts to reduce its inventory and boost sales. As a result, going ahead, its margins will be pressured. Accordingly, the company provided its fiscal-year 2013 EPS guidance below the Street, projecting EPS in the range of between $4.15 and $4.45, well below the earlier-anticipated $4.65 per share. Analysts have been reducing their EPS estimates over the past 90 days. Still, trading at only 10.4x forward earnings, the stock offers value as a potential long-term retail turnaround play.
On April 2, one of the company's directors, Stephanie Streeter, purchased 2,500 shares of KSS at an average price of $45.38 per share. The stock is currently trading at $48.11 per share. It should also be noted that one insider, Senior Executive VP, Peggy Eskenasi, sold 1,100 shares on the same day. Her average selling price was $45.44 per share. As regards hedge fund interest, Anthony Bozza (Lakewood Capital-check out its top picks) was accumulated KSS shares last quarter.
Macquarie Infrastructure Company LLC pays a dividend yield of 5.1% on a payout ratio of 74% of its trailing free cash flow. The company adheres to a policy of distributing "substantially all" free cash flow to shareholders. Its implied rate of free cash flow growth, and thus its anticipated dividend growth rate, is 10% per year. Aside from being a dividend growth play, the stock is also undervalued, as it trades at a 12.6x forward free cash flow.
The stock is often considered a play on natural gas, and its fundamentals are supported by higher demand from a recovering economy, higher sales of jet fuel, and increased district cooling services. The company says that due to "a heightened level of interest from shareholders, MIC is preparing to implement a direct stock purchase plan… available as of the end of the first quarter (2013)." The company presents the program as an "economical means of reinvesting our quarterly cash dividend," in an effort to boost the appeal of the stock with retail shareholders.
On March 28, the company's CEO, James Hooke, purchased 13,327 MIC shares at an average price of $51.13 a share. The shares were acquired from Macquarie Infrastructure Management Inc., the external manager of MIC. The purchase was funded via a loan from Macquarie Group. Hooke said he purchased the shares "in direct response to shareholder requests." The stock is currently trading at $52.47 a share. Last quarter, among hedge funds, Senator Investment Group (see its major picks) held the largest position in the stock, valued at more than $182 million.
Agree Realty Corp., a shopping-center REIT, pays a dividend/distribution yield of 5.4% on a payout ratio of 79% of the 2012 adjusted FFO. The REIT increased its regular dividend/distribution by 2.5% in March 2013. Agree Realty has been focused on debt reduction and sustainable growth through accretive acquisitions and new developments. Last year alone, it acquired 25 single tenant net leased properties for $81.5 million, which was more than double the acquisition value in 2011. Historically, some 63% of annualized base rents derived from its properties are from investment-grade companies. The newly-acquired properties carry an even higher 68% share. Earlier, the company had experienced problems with some of its tenants, including Borders and Kmart. However, its occupancy has increased significantly over the past year, from 92.7% to 98.0%. Agree Realty currently owns 113 assets in 30 states, containing approximately 3.3 million square feet. In terms of valuation, ADC is trading at 14.1x, below its peer group on average.
In the month of March 2013, the company's CEO, John Rakolta, purchased some 27,271 ADC units at an average price of $27.90 per unit. This follows an earlier purchase of as many as 50,000 ADC units in January 2013. The REIT units are currently trading at $29.14 per unit. With regards to hedge fund interest in this REIT, only a few industry players own small positions in ADC.