Would you like to know your favorite stock as well as company insiders do? There is a way to gain an insider's perspective that's perfectly legal and available to any investor: Just look at insider stock trading data. Company insiders, who include board members and upper management, must regularly disclose their stock trading in filings with the Securities and Exchange.
This is one of the first things Carla Pasternak, editor of StreetAuthority's High-Yield Investing, looks for in an investment for her income advisory. After all, corporate officers know their business better than any outsider. If insiders are buying, then that could signal expectations of an improving performance for the stock.
As in any investment, the method isn't foolproof -- there can be many reasons insiders buy shares -- but overall strong insider buying is a great starting point for further research. And for income investors, insider buying can help identify stocks poised for earnings and dividend growth.
Here are three high-yielding stocks that have recently had strong insider-buying activity...
1. Energy Transfer Partners (NYSE: ETP)
This company has pipeline operations in 11 states and owns the largest intrastate pipeline system in Texas. At present, natural gas operations consist of 23,500 miles of gathering and transportation pipelines, but that number will grow when the company closes its acquisition of oil and gas producer Sunoco (NYSE: SUN). This move greatly expands Energy Transfer's operations and geographic footprint, and strengthens its presence in higher-margin crude oil, natural gas liquids and refined product transportation.
Businesses need energy to operate, which means the pipeline business is relatively recession-proof. Also, since Energy Transfer Partners charges flat fees for transporting fuel in its pipelines, the company it is not hurt by volatile energy prices. Energy Transfer Partners can generate strong profits even if natural gas prices fall.
The company is paying $5.3 billion for Sunoco and funding the purchase with the proceeds from a stock offering. Dilution from the stock offering has caused the share price to drop from $50 in May to a recent $43, but in the long-run, the Sunoco purchase looks like a smart move, because it allows Energy Transfer Partners to diversify further into oil, which could lead to higher profits.
First quarter 2012 earnings before interest, taxes, depreciation and amortization (EBITDA) rose 14% to $536.1 million from $471.3 million a year earlier and distributable cash flow of $320.5 million readily covered the $318.6 million distribution payment. Analysts say merger benefits may drive 59% earnings growth next year and 12% growth in each of the next five years. Energy Transfer Partners pays a $3.58 annualized distribution yielding 8.2%.
2. Greif Inc. (NYSE: GEF)
Insider buying can sometimes signal a turnaround that is gaining traction. This may be the case for global packing manufacturer Greif. After a long hiatus, insiders began purchasing Greif shares in June.
Greif makes bulk containers, containerboard and corrugated products. Most of the company's end markets are cyclical, so Greif's sales declined during the economic downturn, but have been gradually recovering. Also, despite cyclical dips, the company has never posted an annual loss.
Because of restructuring charges, earnings per share fell 27% in the second quarter of 2012 to $0.95 from $1.31 a year earlier. But management's focus on improving cash flow is paying off. In the second quarter, cash flow nearly tripled to $161 million from $55.6 million a year earlier.
Greif is a dividend challenger, based on nine years of increasing dividends and in the past decade the dividend has grown at a 19% compound annual rate. Greif pays a $1.68 annual dividend yielding 4.0% and pays out a conservative 45% of earnings. Analysts look for 14% earnings growth next year and 11% annual growth for the next five years.
3. Mid-Con Energy Partners (Nasdaq: MCEP)
Although a public company for less than a year, Mid-Con is posting impressive gains in production and earnings. The company owns oil and natural gas properties in the mid-continent region of the United States and uses secondary recovery techniques such as water flooding to enhance production.
Mid-Con doubled oil and natural gas production last year, and increased EBITDA by 126% to $24 million from $10.6 million in 2010. Production rose 85% in the first quarter of 2012 compared with the same period a year earlier, while EBITDA jumped 127% to $11.8 million from $5.2 million. A director recently signaled his confidence in this company's prospects by purchasing 20,000 shares during April and May.
After earning $0.86 a share last year, analyst say the company could make $1.68 this year and $1.93 next year. Mid Con pays a $1.90 annualized distribution yielding 8.6% and has strong coverage from cash flow at 116%.
Risks to Consider: Energy Transfer and Mid Con are master limited partnerships (MLPs). Due to a depreciation allowance, most of the distribution received from a MLP is considered a return of capital, not a dividend. This in turn reduces the cost basis of the investment and can result in a larger capital gain (and capital gains tax paid) when the investment is sold. Greif shares are currently affected by an economic slowdown in Europe. But keep in mind that this same company managed to grow earnings 8% annually in the past five years despite the recession.
Action to Take --> My top pick overall is Mid-Con because of this company's robust production and cash flow growth. Energy Transfer Partners is attractive based on new opportunities tied to the Sunoco acquisition that could lead to higher distributions. Greif is my pick for value investors. The stock is bargain-priced at a forward price-to-earnings (P/E) ratio of of 11, which is well below its five-year average P/E of 13.