When insiders buy stock in their own company, it is considered a vote of confidence in the stock. It is also a strong signal to general investors that insiders see an upside potential in the shares of their companies. As insiders have an intimate knowledge of their firms and competition, their inside stock purchases are high-conviction bets on expected gains in stock prices. General investors can take advantage of this information by following the lead of corporate insiders. Of course, due diligence should still be performed before purchasing any stock.
Here are three dividend stocks with recent insider buying:
EXCO Resources Inc. (XCO) is a $1.6 billion independent oil and natural gas company engaged in the exploration and production of oil and natural gas, with a focus on shale formations. The company pays a dividend yield of 2.3%, while competitor Encana (ECA) yields 4.3%. Peer SandRidge Energy (SD) does not pay dividends. Exco Resources is currently operating at a loss. Still, analysts forecast that the company will grow its earnings per share (EPS), on average, at 27.5% per year for the next five years. The stock has been sold heavily on the weakness in natural gas due to an ongoing supply glut. The stock, trading at $7.68 a share, is down 56% on the year. Last month, KeyBanc upgraded the stock to buy, citing several imminent transactions, including the sale of TGGT Holdings, a provider of midstream services to natural gas producers, and several joint-venture agreements for development of conventional gas assets. Exco Resources owns a 50% interest in TGGT Holding and could earn as much as $700 million from its sale. KeyBanc differs with Wall Street on Exco Resources' earnings as it expects the company to earn a profit both this year and next.
As regards insider purchases, there have been five separate insider purchases since June 17, 2012. The company's director Wilbur L. Ross, Jr. and his related entities reported acquiring an indirect ownership a total of 1,300,000 shares of Exco Resources for the cumulative cost of nearly $9 million. The stock is also popular with fund manager Howard Marks (Oaktree Capital Management-check its picks).
Kinder Morgan (KMI) is a $22 billion energy company operating pipelines and storage terminals. It has just completed an acquisition of rival El Paso. Kinder Morgan pays a dividend yield of 4.2% on a high payout ratio of 184% of trailing earnings and a lower ratio of 53% of free cash flow. The company's rivals Enterprise Product Partners (EPD) and Williams Companies (WMB) pay dividend yields of 5.2% and 4.3%, respectively. Analysts forecast that Kinder Morgan's EPS will expand at a spectacular 42% average annual rate for the next five years. To date, the company has had poor net income growth, excessively high debt-to-equity ratio, and rich valuation. Recently, Goldman Sachs rated Kinder Morgan a buy, citing "its strong general partner cash flow outlook, which should drive double-digit dividend growth from a higher proportion of stable, fee-based natural gas pipeline assets." The investment bank set a 12-month price target to $37 a share, implying a 19% gain from the current $31.10 a share. The stock is trading on a forward P/E well above that of its industry.
On June 13, one of the company's directors, Michael Jaye Miller, bought 10,000 shares at $31.40 a share. Kinder Morgan shares are currently up almost 10% in a year. The stock is popular with billionaire Stephen Mandel of Lone Pine Capital (see his top picks).
Medtronic Inc. (MDT) is a medical device maker with market capitalization of $39 billion. The company pays a dividend yield of 2.8% on a payout ratio of 30%. Competitor St. Jude Medical Inc. (STJ) pays a yield of 2.5%, while Boston Scientific Corporation (BSX) does not pay any dividends. The company is expected to boost its EPS at an average annual rate of 6.6% for the next five years. Medtronic has solid revenue growth, good return on equity, and appealing valuation. Its shares are currently changing hands at $37.80 a share or 10.4 times the firm's forward earnings, a major discount to the medical devices industry.
On June 17, one of the company's directors, Richard H. Anderson, acquired in the open market 5,200 shares of Medtronic at an average price of $37.94 a share. Billionaires Ken Fisher and George Soros are also bullish about the stock.