Every week, I try to find the five most opportunistic and timely dividend stocks to highlight as "buy" ideas and present them in these articles. This week, like last week, I'm doing something a little different — this time focusing on eleven beaten down dividend stocks that have seen significant insider buying this past week. These are companies that I either already own or are somewhat familiar with, which makes them easier to write about.
But before getting to the 11 investment ideas, let's briefly assess where we are right now. At the end of this article, I humbly suggest four charities that are working to ease the many hardships brought on by this sudden crisis.
For regular readers, I feel I should say something about the way in which I've written about the coronavirus previously. When the world first began to panic about the spread of the coronavirus in late January/early February, I didn't take it all that seriously. I wrote in a January 29th article that this is not the first act of the movie, Contagion, in which a pandemic ravages the world in a month's time.
To be fair, there are big differences between the viral antagonist of Contagion and the real-world COVID-19 virus. In the movie, the mortality rate was around 20%, the incubation period was a day or two, and the period of time from the onset of symptoms to death was only another day or two. Also, scientists were able to come up with a vaccine unrealistically fast. Compare that to COVID-19, in which the mortality rate is somewhere between 1% and 4%, depending on the quality of the nation's health system; the incubation period is between 2 and 14 days; and the period of time between the onset of symptoms and death is about 10 days.
No, this isn't the movie Contagion, but it's far more serious than how I took it. The exponential growth in new cases continues. The United States has risen from one of the least affected countries to the third highest number of cases in the world, as of March 22nd. Total cases jumped by around 15,000 overnight, with most of those in New York.
What's more, the extreme social distancing measures being taken to flatten the curve of new cases are also having the effect of shutting down the economy. For small to mid-sized businesses with only a few months (or less) of reserves, this economic shutdown is devastating.
The job losses are already skyrocketing. By Thursday, March 19th, the number of hours worked by employees of small businesses had fallen by 44%.
Voluntary social distancing triggered the downward slide in hours worked, but quarantine and lockdown decisions made by state authorities from mayors to governors to federal government leaders have dramatically exacerbated the troubles of many businesses. According to John Waldmann of Homebase:
The introduction of forced closures and shelter-in-place orders has furthered the slowdown. San Francisco, Boston, Pittsburg, New York, San Jose, Chicago, Las Vegas, and Salt Lake City currently have the greatest reduction in hours worked by hourly employees at small businesses—down by 50% or more in each city on Wednesday. In fact, on Wednesday, half of the 50 cities we analyzed were down by 40% or more.
I've noticed it also in my hometown, a small city in Texas of a little over 100,000 people with only a handful of confirmed COVID-19 cases. The mall is closed. Many national retailers in shopping centers are closed. Restaurants have gone to only takeout, drive-through, or delivery. Many are depressingly quiet and empty, both in the dining room and the parking lot. Office building parking lots are half-empty, at best. The only hotbeds of economic activity are the grocery stores and general merchandise stores like Walmart and Target.
Homebase estimates the wages lost last week at $4.6 billion, but at the rate of job losses and reduced hours, the monthly amount could be over ten times that.
By Friday, an astonishing 48% fewer hourly workers were working, compared to the number of workers employed by small businesses in January. The lost jobs and work hours are concentrated mostly in restaurants, bars, entertainment venues such as movie theaters, and beautification services such as nail salons.
Goldman Sachs predicts that 2.25 million Americans filed unemployment claims this past week, which would be the highest amount on record ever and eight times the number of claims filed the previous week. On Thursday, New York's Department of Labor received 159,000 calls before noon, compared to their normal load of 10,000 per day.
This past week, several states' unemployment websites crashed as the number of visitors overwhelmed their server capacity. Many states have woefully unprepared unemployment savings that can quickly be drained at recession-level unemployment rates. My home state of Texas, for instance, has less than six months of reserves available for unemployment benefits. Six other states are worse off than Texas.
States need a federal bailout. Small businesses need a bailout. Consumers need a bailout. The airline industry needs a bailout, as do the transportation, hotel, energy, cruise line, and lots of other industries. Who doesn't need a bailout these days?
But, of course, the federal government is ill equipped to provide these bailouts. It has no reserves. It hasn't run a fiscal surplus anytime recently. All it has is the ability to issue infinite debt, backed by the future earning power of the American taxpayer. That and the printing press, the digital version of which the Federal Reserve is already making ample use.
More and more thinkers are questioning the wisdom of the total economic shutdown. Is the human cost of the enforced social distancing measures worth the human cost of a sharp, deep recession — or depression? Recessions do more damage than just stock market selloffs. In fact, the less well-off are typically harmed by them far more than wealthy. How many high earners have lost their jobs already? Probably very few. It's the hourly workers, the waiters and waitresses, the pedicurists, the bartenders, the hotel maids that are suffering from the shutdown. And getting a $1,000 check in the mail, courtesy of future taxpayers, cannot replace the dignity, stability, and upward mobility of a job.
Surely some social distancing and precautionary measures are necessary at this time, especially to protect the elderly. And massive investment into medical equipment, hospital beds, and pharmaceutical treatments are imperative. But authorities need to let up on their lockdown campaign in the very near future if the United States is to avoid a deep and prolonged recession that would disproportionately harm the most economically vulnerable among us. That is becoming clearer and clearer every day.
As R.R. Reno, editor of First Things, writes, "I fear that, if we continue down this path, our wartime mentality of mass mobilization will have untold consequences, many that we will deeply regret."
Now, more than ever, it seems imperative for dividend investors to practice caution. Certainly, there are some incredible values in the stock market right now, but many mouth-wateringly high yields will prove unsustainable. Some companies that have reliably paid dividends for years are now suspending them.
Macy's announced a total suspension of its dividend on Friday, worse even than its 62% dividend cut during the Great Recession. Hoteliers like Marriott (MAR) have done the same. And then the hotel landlord-operators like Apple Hospitality REIT (APLE) and Chatham Lodging Trust (CLDT) did the same. Airplane manufacturing titan, Boeing (BA), has also slashed its dividend to zero for the first time since it began paying a dividend decades ago. Likewise, American car manufacturer, Ford (F), jettisoned its dividend this past week to preserve cash.
These will not be the last dividends to be cut during this crisis.
How can investors who still have cash to put to work discern between sucker yields that will be cut in the coming weeks and those companies that will manage to muddle through this pandemic with dividends intact? One way to do that is by watching to see what insiders do. Company executives and members of boards of directors might sell stock for a number of reasons, but there's only one reason they might buy stock on the open market — because they believe shares are undervalued and will go up in the long run.
According to a recent Bloomberg article, corporate insider buying is spiking right now, with the global buy-sell ratio higher than it's been since 1999.
(1) Midstream Energy Stocks
In my March 19th article on knife-catching, one of the ideas I presented is the Global X MLP & Energy Infrastructure ETF (MLPX), which owns midstream energy corporations and master limited partnerships in a tax-efficient fund that does not issue a K-1 form. Insiders in most of the fund's holdings have been purchasing shares of their respective companies in the past few weeks. See the article in the above link to peruse screenshots of much of the heavy insider buying.
The ETF is more exposed to natural gas than to petroleum, which is good for the underlying companies' future prospects. While the secular shift toward renewable energy threatens to put a serious dent in oil demand going forward, most people understand that natural gas is cleaner burning and will be necessary for many decades to come. Even in a much more green energy world, natural gas will still be needed to fill in the gaps, at least until battery storage technology drastically improves.
Perhaps that is why insiders of these natural gas-focused companies have been buying so much stock lately. It may also be due to the massive selloff in this space, now rendering a dividend yield for MLPX of over 12.5%.
The good days for oil & gas will return, someday. Until then, what does get pulled out of the ground will need to be transported through MLPX's pipelines, storage tanks, and terminals.
(2) Exxon Mobil Corporation (XOM)
Two executives at integrated oil major, Exxon Mobil, each purchased 30,000 shares of XOM worth $1 million this past week. Andrew Swiger, Senior VP and Principal Financial Officer, and Neil Duffin, president of Global Projects, were the two executives to make the purchases.
These purchases came on the heels of a full 50% drop in the stock price year-to-date (now over that):
With American shale producers considering cutting production and the Texas railroad commissioner (who is deeply involved in energy regulation) meeting with an OPEC representative, there could be hope for a pullback in global oil production soon, which should give a lift to ultra-low oil prices. If that happens and the price of oil rises above $30/barrel, XOM will at least be earning above break-even for existing wells.
Insiders seem to think that there's hope for a higher oil price, or at least that XOM's stock price has been punished more than enough to compensate for the rough road ahead.
As for me, I prefer XOM's rival, Chevron (CVX), which saw some insider buying in late February in the low- to mid-$90s per share. It yields 8.7% and, up until now, has been able to cover its dividend with free cash flow, unlike XOM. But like XOM, CVX has the kind of fortress balance sheet that should allow it to survive this oil price rout and perhaps pick up a few smaller players along the way.
(3) AbbVie (ABBV)
Drugmaker, AbbVie, suffered a sharp pullback in 2019 after announcing the expensive, $63 billion acquisition of Allergan (AGN), the pharmaceutical company most well known for being the maker of Botox. The 2012 spin-off of Dividend Aristocrat, AbbottLabs (ABT), has now returned almost to its 2019 low and offers a starting dividend yield approaching 6.5%.
But ABBV's fundamentals have not changed. The Allergan acquisition, as well as the company's robust development pipeline, should provide ample cash flow to pay down debt and fund continued R&D while supporting the generous dividend before the key US patent expiration of Humira in 2023. ABBV's free cash flow yield sits at 12.5%. Plus, whatever short-term pain is brought on by the current crisis, if any, the company can handle with its enormous cash pile of $10 billion+.
Perhaps that is why insiders have begun buying the stock again. VP and Controller Brian Durkin bought in three tranches last week between $67.50 and $69 per share:
(4) Simon Property Group (SPG)
As the largest shopping mall landlord and operator in the nation, Simon Property Group has been handling the "retail apocalypse" as good as could be expected. Its malls are among the highest quality in the country, and Simon also owns some high-end international malls. The sunny states of Florida, California, Texas, and California make up the largest states for US malls, with a combined 47.5% between them.
The company is also one of only a handful of REITs that sports an A-credit rating, which it should maintain even after closing the acquisition of Taubman Centers (TCO), indicating the strength of its balance sheet.
SPG had already sold off significantly beforeits March 18th announcement that all of its malls would close until March 29th (at least).
This, along with the inevitable rent holidays and vacancy bumps to come this year, will cause a drop in funds from operations. Whether that's a 5% drop or 15% drop (or worse) is unknown, but the REIT's 19.8% FCF yield and $7 billion in liquidity should help sustain the dividend while troubles persist. And SPG has $5 billion+ of lucrative redevelopment opportunities over the next few years once life goes back to relative normality.
The board of directors and CEO David Simon have demonstrated considerable faith in the REIT's ability to bounce back from this crisis through substantial open-market purchases:
There are few more bullish signals for me than when I struggle to fit all the lines of recent insider buying into one screenshot.
(5) W.P. Carey (WPC)
Multi-continental net lease REIT, W.P. Carey, has also suffered a rapid selloff in the last month, totaling around 50% at its worst this past week.
All net lease REITs have sold off in March, each for slightly different reasons. The landlords with tenant industry concentrations in non-essential retail, restaurants, and entertainment have sold off because their tenants have suddenly seen most of their business dry up. For WPC, which is much more focused on industrial (24% of ABR), office (22.5%), warehouse/distribution (21.5%), and self-storage (5.2%) properties, I suspect the panicked selloff was largely due to its European exposure (36.5% of total ABR).
For instance, three of their top ten tenants (as of the end of 2019) operate in Germany (2nd largest), Spain (3rd), and Italy (4th):
But total exposure to Spain, Italy, and France is only 7.9% of total ABR, and the Spanish properties are mostly leased to the regional government of Andalucia (southern tip of Spain).
In the past, WPC has proven its ability to raise capital and buy when other market participants are in distress. In 2009, for instance, the REIT purchased a partial stake in the New York Times headquarters for $225 million along with a stipulation that the newspaper company could repurchase that stake after ten years. Sure enough, WPC sold their stake back to the Times in December, 2019 for $245 million, after enjoying ten years of rental income from the property.
With an investment-grade credit rating of BBB, a low net debt to EBITDA of 5.4x, 30.1% of tenants being investment-grade, and a weighted average remaining lease term of 10.7 years, WPC looks well capitalized and prepared to weather this storm. Insiders (officers and directors alike) have been buying:
(6) Main Street Capital (MAIN)
Main Street Capital is one of the highest (if not the highest) quality business development companies on the public markets with $4.2 billion of investment capital under management. It is an internally managed private equity and debt company that makes portfolio investments in a wide array of industries and sectors in lower-middle and middle-market-sized businesses. It operates somewhat like a bank, except that it also sometimes takes direct equity stakes in its investment companies, which closely aligns the interests between lender and borrower.
Despite being based in Houston, Texas, energy-related companies are only 5% of the portfolio, while "hotels, restaurants & leisure" make up 4%.
One great aspect of MAIN is its conservative debt profile (net debt to equity of 0.69x). Only 5% of its debt matures before the end of 2021. And the company has an efficient operating structure, with SG&A costs to assets of 1.4% versus an average of 2.9% for other BDCs. This efficiency is driven largely by the heavy insider ownership of the company, which aligns interests between shareholders and management.
After a ~60% drop in the stock price over the last month, insiders have been gobbling up shares:
(7) Capital Southwest Corp (CSWC)
CSWC is the closest thing to a "baby Main Street Capital" out there. It's also an internally managed BDC that makes conservatively underwritten loans and equity investments in lower-middle market companies. Like MAIN, CSWC enjoys heavy insider ownership and thus strong alignment of interests between management and shareholders. It recently exercised its ability to expand its credit facility and has almost $200 million to de-risk its balance sheet and support its portfolio companies.
The BDC focuses on companies that are either non-cyclical or were able to perform well during the Great Recession. The financial crisis of 2008 and 2009 and the painful recession that followed provided an example of how different kinds of companies perform in extreme economic weakness, and it also gives lenders the ability to learn how to protect themselves in such scenarios. Says management:
So we go back and look at Great Recession performance in every deal we consider and then replicate that performance at certain years of our financial projections, making sure the capital structure and our risk position is appropriate for the business and industry.
Business services, healthcare, and industrial products make up the largest three industries of CSWC's diversified portfolio.
Like MAIN, insiders at CSWC have been voraciously buying up shares:
(8) NexPoint Residential Trust (NXRT)
I won't spend as much space on this idea since there has only been one significant insider purchase recently, but it's worth mentioning because it operates in a defensive sector and with a business model that I like.
NXRT is not your average apartment REIT. While most of them own higher end, Class A apartment communities, NXRT buys Class B (mid-tier quality) properties with value-add opportunities. It tries to purchase assets at 15-30% of replacement cost, then invests in upgrades and improvements such as granite countertops, contemporary flooring and cabinets, state-of-the-art appliances, and two-tone paint. Not only does it raise the market value of its assets, it also increases rent rates by an average of 11%. At scale, this model renders strong returns.
With this model, the company has been able to grow incredibly fast, from $8.9 million in assets in Q3 2013 to $1.2 billion in assets in Q4 2019. Same-store NOI growth has averaged around 10% since 2015 (vs. 5.1% peer average), and the company has achieved a phenomenal 24.5% annualized return on investment.
Insiders already owned 19.7% of the company as of February 14th, 2020. One exec has now increased his position by $2.5 million as of this past week:
(9) Essential Properties Realty Trust (EPRT)
EPRT is another net lease REIT like WPC, but it is smaller (~$1.15 billion market cap) and focused on middle-market tenants in the United States. But the REIT has sold off particularly hard due to its heavy exposure to service- and experience-oriented companies (92% of ABR). Early childhood education (11.1%), casual dining (5.8%), health & fitness (6.6%), entertainment (4.7%), family dining (3.4%), and movie theaters (2.9%) are being slammed by nationwide social distancing measures.
What's more, along with peer STORE Capital (STOR), EPRT has fairly significant exposure (2.5%, same as STOR) to now-bankrupt regional furniture store, Art Van, which has now permanently closed all stores and begun merchandise liquidation.
But EPRT does enjoy a very low net debt to EBITDA of 5.0x, unit-level rent coverage of 2.9x, 98.2% of properties providing unit-level financials and 60.3% covered under master leases, and a weighted average remaining lease term of 14.6 years. Less than 1% of leases (weighted by ABR) are expiring by the end of 2021. The board of directors are buying:
It's worth mentioning that STOR has also seen significant insider buying in recent weeks, although their tenant mix looks even more susceptible to pain from coronavirus-driven social distancing. In my estimation, EPRT's tenant mix is in a slightly more favorable position right now than that of STOR.
At the very least, the insiders of these two net lease REITs believe that the selloff has been overdone, even if they are facing some serious tenant issues ahead.
(10) Hannon Armstrong Sustainable Infrastructure Capital (HASI)
Hannon Armstrong's business model is a lot like a BDC, but it is structured as a REIT. It invests via debt and equity in renewables, energy efficiency, and sustainable infrastructure projects including water utilities. It's debt to equity ratio sits at 1.5x, but it enjoys a very low average interest rate on its unsecured bonds of less than 4%.
Most (78%) of the investment company's pipeline is in "behind-the-meter" projects — energy efficiency improvements largely for municipalities, universities, schools, and hospitals. Portfolio investments have a weighted average remaining contract life of ~15 years and yield 7.6% on average. By making smart investments and recycling appreciated, lower yielding assets into new, higher yielding assets, core NII has exploded over the last five years.
Insiders have taken advantage of this selloff by making significant open-market purchases:
(11) Community Trust Bancorp (CTBI)
CTBI is a small-cap (~$530 million) regional bank headquartered in Pikeville, Kentucky and serving small to mid-size communities in Kentucky, West Virginia, and Tennessee. The bank offers your standard range of financial services, from retail and commercial banking to wealth management and insurance. Two-thirds of the bank's loan book is in real estate (commercial and residential), and about one-quarter of revenue comes from non-interest income such as wealth management or loan origination fees.
In the past twelve months, CTBI has paid out 32.5% of FCF and 40.8% of EPS. The company has raised its dividend for 39 consecutive years. Currently, CTBI is currently trading at 86% of book value and 97% of tangible book value.
This is probably why management and/or the board decided on March 9th to repurchase up to a million shares in its buyback program. And at least one insider has bought more shares this past week:
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