3 High-Yield Stocks with Heavy Insider-Buying
Whenever I screen for stocks, I always look at whether insiders are buying shares of their companies. This kind of information can be extremely valuable to individual investors.
Insiders know the industry, the inner workings of the company and the business opportunities far better than the average investor. Insiders may buy shares in anticipation of a hot new product, an acquisition or simply because they think the stock is undervalued.
Peter Lynch said it best: “Insiders may sell their stock for many reasons, but they buy for only one: they think the price will rise.”
With these words in mind, I found three great high-yield stocks that have recently experienced heavy insider-buying. Keep in mind that heavy insider-buying is typically a better predictor of long-term stock performance than short-term gains.
1. ConocoPhillips (NYSE: COP)
Last November, CEO Jim Mulva added ConocoPhillips shares to his personal portfolio, an investment of nearly $100 million. And ConocoPhillips looks like a long-term winner.
Already this year, the company announced it would sell $10 billion worth of low-margin assets and re-invest the proceeds in high-return exploration and production (E&P) projects. ConocoPhillips is also spinning off its refining and marketing arm, which will free up even more capital for E&P operations.
The company’s revenue stream is solid. In 2011, for instance, ConocoPhillips’ income grew 48% to $17.5 billion from $11.8 billion in 2010. Also, the company now has exposure to major energy plays such as the Bakken Shale, Eagle Ford Shale, the Permian Basin and oil sands in Canada, as well as a stake in a new $40 billion pipeline that will transport natural gas from Alaska and Asia.
The company has posted 11 straight years of dividend growth, including a 20% increase last year to a $0.66 annualized rate. The payout is only 29% of earnings, which leaves plenty of room for dividend growth. Shares current yield about 3.5%.
2. Senior Housing Properties Trust (NYSE: SNH)
Senior Housing Properties Trust is the nation’s fourth-largest health care real estate investment trust (REIT) and a top owner of senior housing and medical office space. In the past 12 months, insiders have acquired more than $1.2 million worth of shares.
Senior Housing has below-average risk for a REIT, thanks to triple-net leases on its properties that require tenants to pay all operating costs, taxes, insurance and maintenance costs, as well as rent. In addition, Senior Housing has nearly no exposure to cutbacks in Medicaid and other government programs, since it derives 90% of income from private-pay properties.
The REIT’s funds from operations (FFO) — a key measure of cash flow — rose 18% compared with last year to $258 million, reflecting rent increases on renewals. It also completed more than $1 billion of acquisitions in the private-pay senior living and medical-office sectors. These added nearly $5 billion in assets to the portfolio.
Senior Housing pays a 7% dividend and has raised payments 10 years in a row. The REIT pays out 85% of FFO as dividends, which is reasonable for this asset class.
3. Penn Virginia Resource Partners LP (NYSE: PVR)
Penn Virginia owns coal-producing properties and natural gas gathering and pipeline operations. The company’s coal segment has proven reserves exceeding 900 million tons, and the natural gas business operates 4,200 miles of pipeline. Penn Virginia doesn’t mine coal, though — it leases its coal properties to miners in exchange for royalties. These are long-term contracts with guaranteed minimum payments and rising fees based on the volume of coal mined.
An unusually mild winter led to lower coal production and will likely reduce income from the mining business this year. But any weak result in mining will probably be more than offset by a major ramp-up in the pipeline business. Company insiders signaled their confidence in Penn Virginia’s business prospects by acquiring 15,500 shares in fourth quarter of 2011.
Penn Virginia will soon complete major projects, including an expanded gas-gathering system in the Marcellus Shale, a pipeline to deliver water to drillers and an expanded gas-processing facility in the Granite Wash oil field. Capacity on these projects is already booked under long-term contracts, which ensure steady growth in distributable cash flow.
The partnership‘s fundamentals are robust. Revenue increased 34% to $1.16 billion last year from $864.1 million in 2010. Earnings improved 49% to $1.45 per share in the same period. Distributable cash flow (excluding replacement capital expenditures) grew 21% to $170.7 million and more than covered $135.3 million in distributions. In 2012, management forecasts distributable cash flow between a $160 and $180 million.
Distributions have increased 10 years in a row, including an 8.5% hike in February to a $2.04 annual rate. Penn Virginia units yield a rich 9% at the new higher distribution rate.
Risks to consider: Senior Housing relies on a single tenant, Five Star Quality Care, for 45% of its portfolio income. But investors should also note that Five Star is one of the few large operators of senior housing that has remained consistently profitable in recent years.
Action to take –> Of the three stocks I mentioned above, my top pick is Senior Housing. The REIT benefits from favorable demographics, which are expected to drive an impressive 7% earnings growth in each of the next five years. ConocoPhilips and Penn Virginia are forecast to register yearly growth of only about 4% or 5%. But don’t get me wrong, these two energy stocks are still very attractive high-yield holdings, especially for investors who believe energy demand and prices will continue to rise.