Empirical studies show that stock investors who mimic insiders can outperform the market by as much as 7 percentage points. This estimate is based on the assessment of stock market returns over the past fifty years. Mimicking insider purchases is advantageous because it is a strategy based on actions that are a result of well-informed decisions of individuals who have an intrinsic knowledge about the companies whose stocks are purchased and about the firms’ broad competition.
In the month of October, there have been several noteworthy insider purchases of dividend-paying stocks. Some of the dividend payers reporting insider activity include the banking giant, Wells Fargo & Co. (NYSE:WFC), a semiconductor equipment maker, Applied Materials (NASDAQ:AMAT), an asset management firm, BlackRock Inc. (NYSE:BLK), and a women’s specialty retailer, Limited Brands (NYSE:LTD). These four companies are well-known large-cap players, paying dividend yields above that of the 10-year Treasury bond and above or on par with that of the S&P 500 index.
Wells Fargo & Co. (NYSE:WFC)
By asset size, this bank is the fourth largest in the United States. It pays a dividend yield of 2.6% on a low payout ratio of 28%. Its competitors JPMorgan Chase & Co. (NYSE:JPM) and Bank of America (NYSE:BAC) are yielding 2.9% and 0.4%, respectively. Over the past five years, Wells Fargo’s EPS expanded at an average annual rate of 2.7% per year. After a cut in May 2009, the bank’s dividend has increased 4.4 times. Analysts forecast Wells Fargo’s EPS growth to average 8.7% per year for the next half decade. The bank beat analysts’ EPS expectations in its third quarter, with EPS growing 23% over the past year to a new record. The vibrant mortgage refinancing and purchase activities have been fueling growth at this bank. Improving credit quality has also boosted earnings performance. Still, as is the case with the U.S. banking industry at large, Wells Fargo (NYSE:WFC) reported a drop in net interest margin amid a continued low interest rate environment due to the Fed’s expansionary monetary policy. In the future, the bank is expected to continue to benefit from the rebound in the housing market. The stock has a ROE of 12.7% and return on invested capital [ROIC] of 6.2%. As regards its valuation, the stock trades on a price-to-book ratio above the average for its respective industry. The stock is up 27% over the past 12 months.
On October 17, one of the company’s Directors, Stephen Sanger, purchased 10,000 shares of Wells Fargo at an average price of $33.96 per share. Currently, the shares are trading at $33.70 per share. The stock is also Warren Buffett’s favorite investment in the financial services sector. It constitutes the second largest holding or 18.5% of Berkshire Hathaway’s portfolio. Value investor Ken Fisher is also bullish about Wells Fargo.
Applied Materials (NASDAQ:AMAT)
This $13.2-billion manufacturer of semiconductor equipment is paying a dividend yield of 3.3% on a payout ratio of 43%. Its rival Lam Research Corporation (NASDAQ:LRCX) is not paying any regular dividends, while competitor KLA-Tencor Corporation (NASDAQ:KLAC) is paying a dividend yield of 3.4%. Over the past five years, Applied Materials’ EPS and dividends grew at average annual rates of 8.4% and 9.1%, respectively. Analysts forecast that its EPS will expand at an accelerated rate of 9.7% per year for the next five years. While its EPS growth is expected to accelerate in the long term, the near-term performance is challenged by several headwinds. In the previous quarter, Applied Materials’ revenue dropped 16% year-over-year, while earnings plunged 54%. Back in March 2012, Gartner, an IT research firm, predicted that worldwide semiconductor manufacturing equipment spending would drop nearly 12% in 2012 before rebounding by a double-digit rate of 10.5% in 2013, when spending is projected to total $43 billion. This scenario could be questioned given the extended weakness in the sector. In 2014, manufacturing equipment spending is expected to grow by mid single digits. It is forecast to decline again in 2015. Applied Materials (NASDAQ:AMAT) has a free cash flow yield of 11.5%, ROE of 12.8%, and ROIC of 10.5%. On a forward P/E basis, the stock is trading at 19.8x, compared to Lam Research’s 13.7x and KLA-Tencor’s 11.7x. The stock is down 10.4% over the past 12 months.
On October 5, a company’s Director, Robert Swan, purchased 8,890 shares at an average price of $11.22 per share. Currently, the stock is trading at $10.69 a share. Fund managers Sandy Nairn (Edinburgh Partners) and Charles De Vaulx (International Value Advisers) are the largest hedge fund investor in the stock.
BlackRock Inc. (NYSE:BLK)
This $32-billion asset manager pays a dividend yield of 3.2% on a payout ratio of 46%. Peers T. Rowe Price Group Inc. (NYSE:TROW) and State Street Corporation (NYSE:STT) are paying lower dividend yields of 2.1% and 2.2%, respectively. Over the past five years, Blackrock’s EPS and dividends grew at average rates of 26.2% and 19.3% per year, respectively. EPS growth is forecast to average 12.5% per year for the next half decade. Recently, the company reported third-quarter financial performance, featuring a 4.3% increase in revenues and a 15% jump in net income from the same quarter the year earlier. Top line growth was driven by investment advisory services while earnings were helped by lower operating expenses and gains on investments. Assets under management totaled $3.67 trillion as of September 30, 2012, up 9.8% year-over-year. Growth in assets under management was supported by higher net inflows, market valuation gains, investment performance, and the acquisition of Swiss Re Private Equity Partners. The company’s ETFs saw inflows of $25 billion in the quarter. The company is cutting fees to compete better with rivals, which will take a bite out of its margins. The firm boasts ROE of 9.2% and ROIC of 7.1%. As regards its valuation, the stock has a forward P/E of 13.0x, which is below the average ratio for its respective industry and lower than 17.4x for competitor T. Rowe Price Group. Rival State Street has a forward P/E of 10.6x. The stock is up 24.4% over the past year.
On October 18 and 19, one of the company’s directors, James Grosfeld, purchased a total of 300,000 shares at an average price of $190.45 per share. He directly owns over 400,000 shares and about 100,000 indirectly. The stock is now trading at $187.05 a share. BlackRock’s stock is also popular with billionaire and value investor Ken Fisher, who initiated a new position in the stock in the second quarter.
Limited Brands (NYSE:LTD)
This $14-billion women’s retailer of specialty apparel, beauty and personal care is best known for its brands of Bath & Body Works and Victoria’s Secret. The company pays a dividend yield of 2.1% on a payout ratio of 42%. For comparison, its rival Hanesbrands Inc. (NYSE:HBI) does not pay any dividends, while Gap Inc. (NYSE:GPS) and LVMH Moet Hennessy L.V. (LVMUY.PK) pay dividend yields of 1.4% and 2.4%, respectively. Over the past five years, Limited Brands’ EPS grew at an average annual rate of 10.1% per year. Analysts forecast that the company’s EPS growth will accelerate to an average rate of 14.5% per year for the next five years. The regular quarterly dividends have increased 67% since the fourth quarter of 2010. Last month, the company paid a special dividend of $1.00 per share (equivalent to the current annual dividend). The company recently posted earnings that beat analyst expectations and upped its outlook based on strong sales at its flagship stores. The stock boasts a ROE of 38.5% (five-year average) and ROIC of 17%. Limited Brands has a forward P/E of 15.6x, which is a 4% premium to its respective industry’s ratio of 15.0x. Competitor Gap Inc., with a forward P/E of 16.2x, is trading at a premium to Limited Brands, while Hanesbrand, with a forward P/E of 10.4x is trading at a deep discount. Limited Brands’ stock has gained 12.2% over the past 12 months.
On October 2, the company’s Director, Michael Morris—who is also a Director at Alcoa (NYSE:AA) and Hartford Financial Services Group (NYSE:HIG) as well as Chairman and retired President and CEO of American Electric Power Company, Inc. (NYSE:AEP)—acquired 10,110 shares of Limited Brands at an average price of $49.43 per share. The stock is now trading at $48.34 per share. The stock is also popular with hedge fund manager Doug Silverman (Senator Investment Group), who initiated a new position in the stock in the second quarter. Among hedge fund managers, Donald Chiboucis (Columbus Circle Investors) holds the largest stake in the stock.
