4 Small-Cap Dividend-Paying Equities with Strong Insider Buying Trends
Published Tue, 08 Oct 2013 09:30 CET by DividendYields.orgIn principle, corporate insiders accumulate stock in their own companies when they are upbeat about their companies’ outlooks. In some instances, their insider stock purchases are a demonstration of commitment to enhancing shareholder value in the business entities in which they personally hold large stakes. Given that corporate insiders have an intimate knowledge of their own companies and competitors, their stock trades can be strong signals to general investors about the expected direction of a company’s stock price. Insider trades have tended to beat broad benchmarks over time. Some research suggests that carefully mimicking insider trades can enhance total returns by between 10% and 15% per year. Still, although there is potential to generate excess returns copying insider buys, all investments should still be based on the objective assessments of a company’s fundamentals.
Based on two market indices that track insider trends, The Vickers Company Insider Index and the J3 Insider Index, there are four dividend-yielding equities found on both index rankings that demonstrate strong recent insider purchase trends. The two indices measure such insider activities as total number of insiders acquiring shares, total number of transactions, total combined value of insider purchases and other proprietary calculations in order to highlight companies with aggressive insider buying over a near/medium term.
The following table presents the main profiles and dividend characteristics of four dividend-paying equities with yields above 2.0% that have recently recorded strong insider buying activity.
Among the featured stocks, Main Street Capital (Nasdaq: MAIN), a business development company (BDC), pays the loftiest dividend yield. On the other hand, PS Business Parks (NYSE: PSB), a multi-tenant flex, office, and industrial space real estate investment trust (REIT), boasts the lowest payout ratio, which suggests there is plenty of room for additional dividend growth in the future. Tessera Technologies (Nasdaq: TSRA), the manufacturer of miniaturization technologies and products for next-generation electronic devices, has a generous capital allocation policy in place that allows for distribution of episodic, annual special dividends. While the company is currently operating at a loss, its payout ratio for the regular dividend based on the current payout and the forecast 2014 EPS is at a low 24.7%. On the other hand, Aircastle (NYSE: AYR), a commercial jet acquisition, leasing, and sales business with some 29 consecutive quarterly dividends paid, offers a good combination of dividend yield and growth, with a particularly favorable payout ratio that indicates more room for dividend growth in line with the future growth in profitability.
Looking specifically into these equities, Main Street Capital, a BDC, is required to distribute at least 90% of its investment company taxable income to shareholders so as to avoid taxation at the corporate level. This results in high dividend yields, which in the case of MAIN is quite lucrative. The company provides “long-term debt and equity capital to lower middle market companies and debt capital to middle market companies.” Its capital is engaged in “buyouts, recapitalizations, growth financings, refinancings and acquisitions of companies” across different industries. The company has a conservative balance sheet, low cost structure, and a well-diversified portfolio. It also has a “significant estimated undistributed taxable income of some $46.4 million,” based on June 30, 2013 data. Aside from paying monthly dividends, this BDC started paying periodic supplemental dividends in January 2013 and moved to semi-annual supplemental dividends in July 2013. The company’s management and affiliates hold large equity stakes in MAIN – some 9.2% of total ownership and $89.5 million of market value, based on June 30, 2013 data.
Aircastle, termed “the only truly globally owned aircraft leasing company”, has some 159 aircraft on lease with 69 customers in 36 countries. The company has already invested $2.35 billion since yearend 2010, and is planning to boost plane leasing assets to $10 billion over the next five years. The company has strong performance indicators, as its utilization rate stood at 98% and rental yield was 13.4% in the second quarter of 2013. Aircastle’s performance is driven by robust passenger and freight traffic, with growth rates generally exceeding the rate of GDP growth. The company also has attractive valuation, trading at less than half the industry average price-to-book ratio.
PS Business Parks owns some 28.2 million rentable square feet with approximately 4,600 customers located in eight states, including California, Virginia, Florida, Texas, Maryland, Washington, Oregon, and Arizona. PSB's has shown positive operating performance with same-park occupancy averaging 92% for the six months ended June 30, 2013 (up 50 basis points from the year earlier). Its same-park NOI was up 0.7% in the first six months of this year versus the same year-earlier period. Non-same park metrics exhibit robust growth. PSB has a conservative balance sheet and solid fixed charge coverage, with the ratio of FFO to fixed charges of 14.4x.
Tessera Technologies is particularly hot with activist hedge funds, including Starboard Value LP, which owns an 8.6% stake in Tessera (constituting the fund’s third largest holding). Earlier this year, Tessera and Starboard reached an agreement to appoint six Starboard nominees to the company’s 10-member Board of Directors. Another activist hedge fund with a disclosed stake in this company is Steve Cohen’s SAC Capital. Tessera has been a laggard among its peers in recent years; however, its operating performance is expected to improve dramatically in the medium term, with analysts forecasting a 24% EPS CAGR for the next five years. What makes this company interesting from the standpoint of dividend investing is its capital allocation policy that provides for “episodic” special dividends. The company’s new capital allocation plan “provides for annual special dividends equal to 20%-30% of any episodic gain.” The company is flush with cash and short term investments (i.e. liquid assets), which combined represent more than 60% of the company’s total assets and almost as much of its enterprise value. The stock is also valued well below its industry’s price-to-book ratio.
The aforementioned four equities rank high on the indices tracking insider purchase trends. Therefore, they could represent ideas for further research of potential investments for dividend income and capital gains.