Who doesn't want to know which dividend stocks are being bullishly bought by insiders in 2014, right?
Today I hunted down undervalued dividend stocks with just that idea in mind.
Still, why does insider-buying matter?
Earnings season has handed out mixed results and with the market yo-yoing up and down insider buying can indicate which dividend-paying companies are either undervalued or likely to outperform in 2014. After all, I doubt insiders would bullishly buy up their stock if they didn't feel confident that their company was undervalued or likely to exceed market expectations.
This is exactly why I first screened for insider buying that exceeded 5% in the last 6-months.
To narrow the list I focused on dividend stocks, which have been operating with a strong Return on Equity (ROE>10% TTM).
ROE is a helpful go-to profitability metric that lets investors get a quick snap shot of how well a company is generating profits relative to shareholders' equity.
I then shortened the list further by looking for dividend stocks whose current P/E was less than 15 given that the market seemed a little frothy up until this small market correction.
Finally, I screened for dividend stocks, which are still offering investors a dividend yield of at least 3% or higher. Given fixed income markets are still offering poor yields, in my opinion, dividend stocks look to be the only way to generate real cash flow from a portfolio right now.
This list of dividend stocks are listed by market cap from highest to lowest:
1. Eli Lilly and Company (LLY)
Eli Lilly and Company develops, manufactures, and sells pharmaceutical products around the world. Right now Eli Lilly and Company has a market cap. of $62.31B and a P/E Ratio of 13.45.
Currently, Eli Lilly and Company offers a dividend yield of 3.38% and operates with a current ratio of 1.50. In addition, Eli Lilly and Company has operated with a ROE of 29.00% over the last 12 months.
Over the last 6-months insider buying at Eli Lilly and Company has increased by 32.23%.
On January 16, 2014 Barclays downgraded Eli Lilly and Company from equal weight to underweight with a new price target of $51 from $58.
The downgrade by Barclays, which counters recent bullish insider buying, implies that they believe Eli Lily has become overvalued relative to its current and future business endeavors.
Still, only time can tell whether Eli Lilly and Company has actually become overvalued or not in 2014 according to Barclays. Either way this analyst note is something investors' should be aware of as they do their own due diligence on the stock.
2. Freeport-McMoRan Copper & Gold Inc. (FCX)
Freeport-McMoRan Copper & Gold Inc. engages in the exploration of natural minerals. Right now Freeport-McMoRan Copper & Gold Inc. has a market cap. of $34.64B and a P/E Ratio of 12.68.
Currently, Freeport-McMoRan Copper & Gold Inc. offers a dividend yield of 3.70% and operates with a current ratio of 2.10. In addition, Freeport-McMoRan Copper & Gold Inc. operates with a ROE of 13.40% over the last 12 months.
Over the last 6-months insider buying at Freeport-McMoRan Copper & Gold Inc. has increased by 23.12%.
On January 23, 2014 Barclays reiterated an Overweight ranking for Freeport-McMoRan Copper & Gold but reduced its price target to $43 from $45.
While Barclays rating is in-line with bullish insider buying, in my opinion, the price target drop probably stems from weakened gold pricing along with a more volatile gold market.
3. Noble Corp. (NE)
Noble Corp. operates as an offshore drilling contractor for the oil and gas industry. Right now Noble Corp. has a market cap. of $7.89B and a P/E Ratio of 10.86.
Currently, Noble Corp. offers a dividend yield of 4.81% and operates with a current ratio of 1.40. In addition, Noble Corp. has operated with a ROE of 11.10% over the last 12 months.
Over the last 6-months insider buying at Noble Corp. has increased by 18.75%.
On January 27, 2014 Cowen reiterated an Overweight ranking for Noble Corp. but reduced its price target from $49 to $44.
While Cowen's outlook on Noble Corp. is bullish, which is in-line with bullish insider buying sentiment, I believe the price target was reduced due to restrained US economic growth and oil prices. These two variables have influence on overall drilling contract demand and contract pricing.
4. Olin Corporation (OLN)
Olin Corporation manufactures and sells chlor alkali products all over the world. Right now Olin Corporation has a market cap. of $2.07B and a P/E Ratio of 11.76.
Currently, Olin Corporation offers a dividend yield of 3.08% and operates with a current ratio of 2.10. In addition, Olin Corporation has operated with a ROE of 16.80% over the last 12 months.
Over the last 6-months insider buying at Olin Corporation has increased by 15.38%.
On February 10, 2014 UBS reiterated a Neutral ranking for Olin Corporation but increased its price target from $23 to $25.
The reiterated Neutral rating, which counters recent bullish insider buying, implies that in the opinion of UBS the stock can't move higher based off its current fundamentals.
Ultimately, only time can tell whether UBS or business insiders are correct on whether the stock is already trading at fair value or has room to move higher in 2014.
In my opinion, LLY looks the most interesting given insider buying has increased by 32.23% and it also has the highest ROE profitability metrics out of the four companies identified.
I hope this article helps as dividend investors do their own independent due diligence and research on dividend stocks that are being bullishly bought up by company insiders.
All the information was sourced from Finviz.com, which includes the insider buying information and analyst notes that I listed above.
Additional disclosure: The information and analysis listed here should not be misconstrued as direct individual investment advice.