Insiders buy stocks of their own companies for only one reason-they expect share prices to rise from the current levels. Investors who follow the insiders' suit stand a good chance to realize attractive returns from their investments. In fact, academic studies suggest that stocks intensively purchased by insiders tend to outperform index funds by more than 7% per year.
Recently, insiders snapped up shares of several dividend-paying companies, including the likes of General Electric (GE) and Viacom Inc. (VIA)(VIAB). Here is a quick glance at recent insider purchases in four companies that pay dividend yields in a range between 2.2% and 3.7%.
Cypress Semiconductor Corporation (CY) is a $1.8-billion semiconductor company that produces and sells processors and chips for computers, phones, and other integrated electronic devices. The chip maker pays a dividend yield of 3.7% on a payout ratio of 126% of trailing earnings but only 42% of last year's free cash flow. Its peers Xilinx Inc. (XLNX), STMicroelectronics NV (STM), and Texas Instruments (TXN) pay dividends yielding 2.6%, 5.8%, and 2.3%, respectively. Over the past five years, Cypress Semiconductor saw its EPS surge at a spectacular rate of nearly 50% per year. The company's quarterly dividend grew 22% over the past year. Despite the weak macroeconomic environment weighing on the chip market, the company posted revenue and EPS growth in the previous quarter, boosted by touchscreen technology sales, better gross margins, and firm cost controls. Touchscreen sales are expected to remain robust, in line with broader trends in the demand.
As regards to insider purchases, on August 16, one of the company's directors, Donald Sherman, purchased 9,000 shares at an average price of $11.98 per share. The company's stock is currently trading at $11.85 a share, below the transaction price and 16% higher than the stock's 52-week low. The stock is also popular with billionaire Ken Griffin, who has more than $100 million invested in it.
Archer Daniels Midland Co. (ADM) is a $17.4-billion company and one of the world's largest processors of agricultural commodities and ethanol producers. The company pays a dividend yield of 2.7% on a payout ratio of 38%. Its main competitor Cargill is privately held, while peers Bunge Limited (BG) and Tyson Foods Inc. (TSN) pay dividend yields of 1.7% and 1.1%, respectively. Over the past five years, even though it saw its EPS contract, Archer Daniels Midland Co. was able to boost dividends at an average rate of 9.5% per year. Analysts forecast that the company's EPS will grow at 10% per year for the next half decade. However, the current drought is reducing the company's export volumes and squeezing its profit margins, especially on ethanol. Despite the operational headwinds, the company is expanding operations internationally, especially in emerging markets.
Between August 2 and 7, three company's insiders purchased shares in the open market. Two Senior VPs and Executive VP/COO purchased a total of 11,932 shares for the total cost of $305,606 (at $25.61 per share, on average). The stock is currently hovering around $26.38 a share. Fund managers Phill Gross, Cliff Asness, and Steven Cohen are bullish about the stock.
Viacom Inc. is a $26-billion media & entertainment conglomerate. It operates famous TV networks such as MTV and Nickelodeon as well as film production companies including Paramount Pictures and DreamWorks Pictures. The company pays a dividend yielding 2.2% on a low payout ratio of 32%. Its competitors Time Warner (TWX) and Walt Disney Company (DIS) pay dividend yields of 2.5% and 1.2%, respectively. Viacom is a company that owns well-established and renowned brands. It has a wide moat and its brands are leaders in their respective sectors. The stock is trading at a significant discount to its respective industry and five-year average metrics. It has a free cash flow yield of 6.7% and ROE of 26%.
Among a slew of option exercises and stock sales in August, on August 5, the company's founder, Executive Chairman of the Board and the well-known media magnate, Sumner Redstone, purchased 8,000 shares in the open market at an average price of $47.68 per share. The stock is currently trading at $50.91 a share. Viacom Inc. is also popular with Berkshire Hathaway's investment legend Warren Buffett (check out Berkshire Hathaway's top holdings).
General Electric is a $220-billion multinational conglomerate engaged in the manufacture and sale of industrial products and household appliances. It also provides financial services. The company pays a dividend yield of 3.3% on a payout ratio of 59%. The company's peers 3M Company (MMM), Honeywell (HON), and Siemens AG (SI) pay dividends yielding 2.5%, 2.6%, and 3.1%, respectively. While the company's EPS shrank over the past five years, analysts forecast that GE's EPS will expand at nearly 13% per year for the next five years. However, in light of the current macroeconomic challenges, this could be an overly upbeat prognosis. Still, the long-term outlook is bullish, especially based on the company's diverse product mix and growth drivers in emerging markets. Interestingly, according to a recent Seeking Alpha article and the data from the Center for Responsive Politics, based on the last-available data from 2010, GE was the most widely-owned stock among the members of U.S. Congress.
In terms of insider purchases, on August 2, one of the company's directors, Joseph Brennan, purchased 20,000 GE shares at an average price of $20.44 per share. The stock is currently trading at $20.80 a share. Among fund managers, billionaires Ken Fisher and George Soros have made large bets on the stock.