With more analysts and investors getting concerned about a possible dividend stock bubble, it makes sense to be selective when making new investments. Many dividend stocks are at or near 52-week highs, and that has pushed yields down.
Aside from traditional valuation metrics like book value and price to earnings ratios, investors can also consider how a stock is valued by looking at what the insiders are doing. Company executives and directors tend to know more about the future prospects than an average investor or analyst would. That is why it can make sense to consider buying if insiders are making a significant investment in the stock. Here is a closer look at two companies that are seeing significant insider buying recently.
Prospect Capital Corp. (PSEC) shares have been in a strong uptrend and recently hit a new 52-week high. However, that has not stopped at least one insider from making a significant investment into this company. On September 5, 2012, Brian Oswald (an officer) purchased 23,352 shares in a transaction valued at nearly $272,984. This is just one of the latest buys that have been taking place for the past year. For example, last September, Grier Eliasek (an officer) bought 46,000 shares in a transaction valued at $384,560, and other buys have taken place since then. Even though the shares are trading near 52-week highs, insiders are still buying and that is a positive sign.
This company makes debt and equity investments in a variety of small to midsized companies in industries such as energy, manufacturing, healthcare, financial services, etc. It has made debt and equity investments in companies like Totes Isotoner Corporation, Arctic Glacier Holdings, Inc., Targus Group International, Inc. and many others. Since Prospect Capital is set up as a business development company, and because it uses leverage, it is able to offer shareholders a very generous dividend yield. This stock is trading at a slight premium to book value, which is $10.82 per share. This company recently reported solid financial results. For the June 2011 quarter, it announced net investment income of $30.2 million or 31 cents per weighted average number of shares for the quarter. Prospect pays the dividend on a monthly basis at a rate of just over 10 cents per share. For many investors, this is ideal when compared to most dividend stocks which pay dividends on a quarterly basis. Since the stock has been trending higher, investors might want to wait for a pullback to around the $11 level before buying.
Here are some key points for PSEC:
Current share price: $12.04
The 52-week range is $7.58 to $12.10
Earnings estimates for 2012: $1.50 per share
Earnings estimates for 2013: $1.17 per share
Annual dividend: $1.22 per share which yields 10.3%
Armour Residential REIT (ARR) shares are also trading near 52-week highs, but it might have further to run. On September 6, 2012, Thomas Guba (a director) purchased 20,000 shares in a transaction valued at nearly $151,200. This follows multiple insider buys earlier this year, which seems to show a trend of steady accumulation. On March 13, 2012, Marc Bell (a director), purchased 35,000 shares in a transaction valued at $231,000. On the same day, Daniel Staton (a director) purchased 50,000 shares in a transaction valued at $330,000.
Due to special status as a real estate investment trust (REIT), this company is mandated to pay the vast majority of its earnings out to shareholders. That is one reason why it pays an outsized dividend. The other reason is because Armour uses leverage. By borrowing money at low rates in order to invest in higher yielding securities, Armour is able to produce earnings on the spread. It is focused on investing in adjustable rate and fixed rate residential mortgage-backed securities that are either issued by or guaranteed by U.S. Government agencies or U.S. Government sponsored entities, such as Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). Another positive is that this company also pays the dividend on a monthly basis, which can help some investors create a more steady stream of income.
Here are some key points for ARR:
Current share price: $7.52
The 52-week range is $5.40 to $7.98
Earnings estimates for 2012: $1.21 per share
Earnings estimates for 2013: $1.13 per share
Annual dividend: $1.20 per share which yields about 16%
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.