Insider Yield Plays

With uncertainty lingering about the direction of the stock market's next big move, getting cash out of investments sooner rather than later can add some comfort. But what's an income investor to do to help winnow the safe yield plays from the merely seductive ones? Once again, insiders can be extremely helpful in guiding the way. I run a screen every week at www.InsiderInsights.com looking for high-yielding stocks that also have insiders buying. While an indicated yield can become artificially high as a stock trades lower in anticipation of a payout-destroying event, such a reduction seems logically less likely if insiders are buying. To the extent a dividend reduction has to be voted on, large purchases by board members of a high-yielding stock would certainly make them less interested in voting for one. And for other income-generating securities that pay out a percentage of profits, insiders buying into their high yields would seem to indicate that any anticipated reduction of distributable cash flow won't be as bad as the market expects. Below is a screen for stocks with insiders accumulating shares since the beginning of April that also have at least a 4% yield currently indicated. Insiders can have bought in the open market, or accumulated via exercising incentive options and not cashing them all out. I also add a filter to make sure there were no open-market sales by insiders over the same period. (That includes option-related sales as well.) Insiders Buying High-Yield Stocks View Chart » As always, common sense should reign when digging into this screen's results for investment ideas. First of all, it is only a first screen to determine where you should concentrate further analysis, not a buy list. But as far as first screens go for income investments, it's the best I know. Also, the maxim of if something appears too good to be true, it probably is still applies. So when I see securities on my insider screen with indicated yields north of 20%, I'm more suspicious than salivating. Fundamental data sources only update their indicate yield fields for companies after a change is made. Knowledgeable traders are much quicker to react to risks to yield and usually bid a stock down long before the actual news hits the tape. Indicated yields become outsized in the meantime. In any case, my latest pick from this screen is actually much further down the list. With an indicated yield of 4.3%, I like Philip Morris International (PM). Philip Morris International was spun off from Altria Group (MO) in March, 2008 and controls roughly 15% of the global cigarette market. The company is especially prominent in the premium end of the business with brands such as Marlboro, Parliament, Virginia Slims and others. This stock hit on my radar after insiders bought and opted into shares over the past several months, indicating to me that fundamental trends will likely remain intact for the near future. Chairman Louis Camilleri's opting-in transaction on Oct. 26 increased the number of shares he's letting swing with this market's vagaries by 5.4%. Though this was the most notable of the recent insider accumulations of PM, the fact that two other directors at the firm also boosted their stakes by more than 3% in the past two months formed a buying cluster that qualified PM for further examination. Philip Morris' fundamentals are quite impressive when you consider that the entire tobacco industry was written off more than a decade ago. Philip Morris' international focus, in markets where anti-smoking campaigns are not quite as fierce, is really paying off. Third-quarter results highlight the life left in this business model. EPS of $1.37 was ahead of forecasts for one simple reason: Asia. Demand in Japan for Philip Morris' cigarettes soared a hefty 47%, boosting total market share to 28%. Indonesian sales rose a solid 22%. In virtually all of its markets, Philip Morris is getting away with steady price increases, helping to mitigate unit sales declines in other countries. Philip Morris' price hikes are why sales are likely to grow 12% (and perhaps as much as 15%) in 2011. Price hikes also mean stronger margins. As a result, PM just bumped up the bottom end of its EPS guidance by a nickel for this year, to $4.70. If met, it would represent about 20% growth, an impressive rate for such a large firm during a time of such uncertainty. As it stands now, the company generates roughly $10 billion in annual operating cash flow. At a 60% payout ratio, that represents a dividend yield of 4.3%. The funds that aren't going to support its dividend are being earmarked for stock buybacks. The share count of PM has been steadily dropping, from 2.1 billion at the end of 2007, to a current 1.8 billion. To be sure, I'm not in this name for robust upside. The stock trades for around 15x projected 2012 profits, and I only see that multiple expanding by a modest amount. But EPS can keep growing at a 10% pace beyond 2012, while continuing to throw off its respectable dividend. In this challenging market environment, PM is a stock that even (rightfully) skittish investors can justify buying into for the low-risk, 18% to 20% total return that seems likely in the next year.

Insider Yield Plays

Philip Morris International is worth a closer look.

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