With investors expecting the U.S. Federal Reserve to restart its rate-cutting cycle in September, dividend payers could become more attractive as short-term interest rates fall. A big question with high dividend payers is whether those dividends are sustainable.
Insider buying is not a foolproof screen that guarantees the sustainability of a dividend, but seeing insiders invest their own money into a stock can increase our conviction that the market is likely underpricing that dividend’s sustainability.
Let’s look at three stocks which have high dividends combined with high insider commitment.
The first of these is Colombia-focused oil and gas firm Parex Resources Inc. PXT-T. Parex is down over the past year, but it is up 25.5 per cent over the past three months as of Monday, setting a year-to-date high of $16.55 on July 31. It has a quarterly dividend of 38.5 cents per share ($1.54 per share annualized). As of Monday’s close, that works out to an indicated annual dividend yield of about 9.6 per cent.
In the second quarter, Parex reported cash provided by operating activities of US$142.6-million, which was more than enough to cover dividend distributions that used about US$27.6-million in cash. At INK, we tend to focus on insider activity with in the past six months. In that time, three insiders bought $650,100 worth of shares in the public market. Parex has also been buying back shares.
According to INK data, since the start of the year, the company has spent almost $18.6-million buying back 1,379,900 shares at an average price of $13.48. When a company is buying back shares, we would much rather see company officers or directors being net buyers of stock as we see at Parex rather than being net sellers.
The next is oil and liquids pipeline operator South Bow Corp. SOBO-T. South Bow has had a nice bounce from its April lows, up 11.5 per cent over the past three months. South Bow has a quarterly dividend of 50 US cents per share (US$2 per share annualized). As of Monday’s close, that works out to an indicated annual dividend yield of about 7.1 per cent.
In the second quarter, South Bow reported net cash provided by operations of US$194-million which covered dividend payments worth US$104-million. Over the past six months, insiders have been net buyers of $973,196 worth of stock in the public market. Eight insiders bought almost $2.2 -million worth of shares while three insiders sold a total of about $1.2-million worth of stock.
According to INK data, insider equity holdings have risen 30 per cent over the past six months and now stand at 310,413 shares as of Aug. 19. That is a positive development for a company that has been trading for just under one year.
Switching gears, we look at internally-managed Automotive Properties Real Estate Investment Trust APR-UN-T which holds a portfolio of 80 automotive dealership properties consisting of approximately three million square feet of gross leasable area in urban centres in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec in Canada, and Florida and Ohio in the United States. The REIT has a monthly distribution of 6.85 cents per REIT unit 82.2 cents per REIT unit annualized). As of Monday’s close, that works out to an indicated annual dividend yield of about 7.1 per cent.
In the second quarter, Automotive Properties REIT reported cash flow from operating activities of almost $19.6-million while using almost $9.9-million for distributions. Over the past six months, three insiders spent $1,036,540 acquiring trust units in the public market, while one insider sold $159,673 worth of units. The REIT is up 12.4 per cent over the past six months but remains off its 52-week high of $13.32 set on Oct. 23 after a late summer rally. We will have to see if the prospect of Fed rate cuts adds fuel to this REIT in the weeks ahead. Either way, insiders appear to have high conviction on Automotive Properties REIT’s prospects.
Ted Dixon is CEO of INK Research which provides insider news and knowledge to investors. INK staff may also hold a position in profiled securities.