Corporate insiders often sell stock in their own companies when they think that stock prices are likely to drop in the future. Given their intimate knowledge of their businesses and industries, insiders have an edge over outside investors. Therefore, corporate insiders' trades provide a good gauge about their companies' stock market prospects. Mimicking insiders can prove to be a sound investment strategy in order to preserve capital or maximize stock market returns. However, investors who mimic corporate insiders should also be aware that insiders sometimes sell their stocks in order to diversify their holdings, to meet planned equity sale schedules, and to meet option expiration deadlines.
Recently, there have been several noteworthy insider sales involving reputed large-caps that are paying meaningful dividend yields. Here is a quick overview of four such sales transactions by corporate insiders:
Kohl's Corp. (KSS) is a $12.5-billion operator of department stores in the United States. It pays a dividend yielding 2.5% on a low payout ratio of 30%. The company's peer Macy's Inc. (M) pays a dividend yield of 2.2%, while competitor J.C. Penney (JCP) terminated its regular quarterly dividends to boost sales. The company is getting increasing competition from discount retailers such as Target (TGT) and Wal-Mart (WMT), which pay dividend yields of 2.3% and 2.1%, respectively. Over the past five years, Kohl's EPS grew at an average rate of 5.4%. Dividends increased 28% over the past year. Analysts are bullish about Kohl's future EPS, forecasting growth on average of 11.5% per year for the next five years. Given the expectations of moderate gains in employment and incomes going forward, discount department stores like Kohl's stand to gain relative to more upscale competitors. In principle, retail buyers' inclination toward value purchases will bode well for this discount department store chain. Still, the company is vulnerable to a weak U.S. economy, which may be weighing on the retailer's prospects.
In the August 13-24 period, there were 10 sales transactions and one option exercise involving the stock. Aside from the option exercise by Peggy Eskenasi (Sr. Executive VP) worth circa $2.9 million and her subsequent sale of the stock for little more than $3 million, three different company's directors (Kellogg, Sommerhauser, and Herma) sold some 1.44 million shares for a total value of about $74.4 million. On the other hand, billionaire Stephen Mandel bet on the stock with a near $200 million investment in the second quarter.
Illinois Tool Works (ITW) is a $28-billion manufacturer of industrial products and equipment. It pays a dividend yield of 2.7% on a low payout ratio of 32%. Its competitors Dover Corporation (DOV), Danaher Corp. (DHR), and IDEX Corp. (IEX) pay yields of 2.5%, 0.2%, and 2.0%, respectively. The company's EPS grew at 8.2% per year over the past five years, while dividends increased at an average rate of 11.4% per year. Analysts forecast that EPS growth will average a higher 11.2% per year for the next half decade. Despite the recent slowdown in sales in Europe, the company posted positive revenue and robust EPS growth in the most recent quarter. An expected rebound in the U.S. economy-primarily in industrial production-will bode well for the company, whose shares have touched a new 52-week high. On a forward P/E basis, the stock is trading below its respective industry, despite its rallying to a new 52-week high.
On August 17 and 21, in total, there were four option exercise transactions of 491,823 shares worth $21.7 million, followed by four sales transactions for the total value of about $29.5 million. Among the sellers was the company's President and CEO, David Speer, whose transactions accounted for the majority of the share count and value. Separately, on August 17, one of company's directors (Robert Mccormack) sold 128,500 shares for a total value of nearly $7.7 million. Among fund managers, Ralph V. Whitworth (Relational Investors) has more than $770 million invested in the company.
Baxter International Inc. (BAX) is a $32-billion diversified medical products and services company producing medical devices, pharmaceuticals, and biotech products. It pays a dividend yield of 3.1% on a payout ratio of 44%. Its competitors Abbott Laboratories (ABT) and Becton, Dickinson and Company (BDX) pay dividends yielding 3.1% and 2.4%, respectively. Baxter has seen rapid EPS growth, averaging 12.7% per year over the past five years. Its dividends grew 14.4% per year over the past half decade. Based on its forward P/E, the stock is undervalued relative to its peer group and its own five-year historical ratios. The company has a high ROE of 28.6% and return on invested capital [ROIC] of 18.4%.
In August, there were three option exercises followed by three sale transactions of the company's stock. Corporate VPs Riedel and Batchelor as well as the company's director Shapazian exercised options on 78,835 shares worth almost $2.98 million and sold those shares for $4.65 million. The brunt of the stock option exercises and sales was attributed to VP Riedel. It is worth noting that Baxter International is popular with billionaire Jim Simons and fund manager David Cohen (Iridian Asset Management).
International Paper Company (IP) is a $15-billion market leader in paper and packaging with worldwide operations. It pays a dividend yield of 3.2% on a payout ratio of 42%. The company's peers Domtar Corporation (UFS), Packaging Corp. of America (PKG), and Rock-Tenn Co. (RKT) yield 2.5%, 3.3%, and 1.3%, respectively. Over the past five years, International Paper's EPS and dividends grew at modest rates of 2.4% and 1.0% per year, respectively. Analysts forecast a somewhat faster EPS growth in the future, averaging 6.0% per year for the next five years. Some investors see a more robust growth in the paper/packaging sector as a result of the booming online sales, which are increasing the demand for cardboard products. Credit Suisse analysts recently upgraded the stock, raising the one-year price target from $34 to $40 a share, based on higher containerboard prices. The company has also indicated its dividend could rise by 50% over the next two-to-three years. On a forward P/E basis, the stock is trading at a discount to the paper industry.
In August, there were four insider transactions, including one option exercise and three stock sales. Carol Roberts (Senior VP and CFO) exercised stock options on 7,500 shares and sold those shares in the open market for the total value of $258,000. On the other hand, the company's Chairman and CEO, John Faraci, sold 6,000 shares for $204,000, while Senior VP, Mary Laschinger, sold 10,000 shares for $330,700. Still, fund manager David Cohen is bullish about International Paper. So is billionaire Ken Griffin.