By Jake Mann
There are many ways to analyze dividend stocks in terms of sustainability, growth and value, but one form of analysis that isn't done enough has to do with insider buying activity. Our research at Insider Monkey indicates that if you know which bullish insiders to follow, it is possible to beat the market over a long-term time frame (check out the data behind this phenomenon).
If we parse down the most consistent dividend growth stocks, those that have hiked dividends in 25+ consecutive years, by finding names with multiple insider purchases in the current calendar year, some intriguing investment ideas arise. Within the financial sector, just two small-cap companies fit both criteria. In terms of recent insider activity, this is the best duo of dividend-paying financials in the small-cap space.
Chances are unless you've run this type of screen before, you've probably never thought of Tompkins Financial (NYSEMKT:TMP) as a top-flight dividend stock. The bank holding company is centered around Ithaca, New York, and offers wealth management, brokerage, banking and leasing services. Remarkably, Tompkins did not take part in subprime mortgage lending nor did it invest in MBS securities prior to the 2008 financial crisis, and was one of the few financial institutions to turn down the government's subsequent bailout.
It is amid this pragmatism that Tompkins Financial has churned out 26 straight years of dividend increases. Now offering investors a dividend yield of 3.2%, Tompkins' payments have increased by 25% since 2007. Over the past twelve months, the company has paid out 59% of its earnings as dividends and Tompkins' forward payout ratio over the next four quarters rests below 50%. There are no red flags here, and we may even see a slight income boost if the next few quarterly earnings reports don't fall off a cliff.
Over the longer term, cash flows are decent and Wall Street expects earnings growth to average 8% a year through at least 2018, so dividends do appear rather maintainable. Anyone looking to buy in now can do so at a modestly attractive forward earnings multiple of 14.5, and two insiders have done just that in the past six months.
In early May, board member Sandra Parker bought close to $70K worth of Tompkins stock at a price just above $40 a share. This move upped Parker's total stake in the company by over sixfold. Just two weeks after this move, Director Daniel Fessenden purchased a considerably less amount of stock to boost his total position in Tompkins to a value worth $48K at the time. The transaction was carried out at $41.63 a share.
Since Fessenden's buy, shares of Tompkins Financial are up almost 12% in about five months. Don't expect the dividend growth to end any time soon, and we'll continue to watch how insiders trade it for the remainder of the year.
Old Republic International
Old Republic International (NYSE:ORI), meanwhile, is the only other financial sector small-cap with a dividend streak of at least 25 years and multiple insider purchases in 2013. Unlike Tompkins Financial, Old Republic is involved in the underwriting business related to property and liability insurance, mortgage guaranty and credit indemnity. Old Republic is a favorite of old school investors like Irving Kahn and Jim Simons, and its shares are already up 40% this year.
The company has raised dividends in 32 straight years and currently pays a whopping dividend yield of 4.8%. On a trailing twelve-month basis, Old Republic has paid out 190% of its earnings as dividends, which is a warning sign that the high yield may not be sustainable. On a forward basis using Wall Street's average EPS estimates over the next four quarters, this payout ratio falls to 130%, but still a red flag nonetheless.
Directors Fredricka Taubitz and Steven Walker have bought a total of $110K worth of Old Republic stock this year, and since the most recent buy made by Taubitz in early March, shares are up more than 20%. Old Republic is also expected to generate annual earnings growth at a 10% clip over the next five years, which is above industry averages, so there's potential for more appreciation moving forward.
Regardless of these prospects, however, the sheer enormity of Old Republic's dividend payout, and the fact that cash from investing and financing turned negative last year, indicates that the 32-year streak may be in jeopardy.