Is American Express' Executive Selling Spree a Red Flag?

On the heels of its lackluster earnings release, American Express' (NYSE: AXP  ) stock has hit five-year highs. And while investors and analysts celebrate the company's forward-thinking business plans and momentum, company executives have been purging their shares. Here's what investors need to know about how to view insider transactions going forward.

By the numbers
Between Jan. 21 and Jan. 29, executives from American Express sold 357,758 shares through direct sales and options exercises for a total cash-out of $21.2 million. While AmEx executives may have sold a lot of shares, it doesn't necessarily mean that they are trying to get out before the bottom falls out from under them. According to a company spokesperson, there are limited windows during the year when executives can buy or sell shares, such as after the release of earnings.

Like most companies, American Express has rules for executives, with minimum ownership requirements. After the sales occurred, the sellers still met all of the company requirements. In fact, AmEx was one of the financial companies with decent insider ownership as of year end 2011.

Company % Insider Ownership*
Capital One (NYSE: COF  )

2.91%

American Express 1.31%
JPMorgan (NYSE: JPM  ) 0.81%
Citigroup (NYSE: C  ) 0.19%
Bank of America (NYSE: BAC  ) 0.07%

Source: Companies 2012 proxy statements and Yahoo! Finance; all percentages refer to ownership at year-end 2011.

All of the companies listed above had insider transactions throughout January, according to Yahoo! Finance, so the share sales from AmEx executives is not a one-off, troublesome event. It's not uncommon for insiders to buy and sell shares throughout the year, so investors need to keep the transactions in perspective.

Money, money, money...
Here at the Fool, insider ownership is one of the key statistics used to evaluate a company. But while it's an important factor, it's not everything. Investors should look at insider ownership -- and so, by degree -- insider selling, with an eye toward context.

In the current era of executive compensation, a trend has developed in that more and more compensation is being "paid" in stock options and shares. Since this percentage of compensation can reach 60%, executives have to rely on the ability to sell those shares or execute options to get income. And with the company's stock at five-year highs, now is an optimal time for executives to cash out for maximum benefit.

The importance of buying and selling
With that last detail in mind, investors should still be aware of the ownership movements for any company's stock. But instead of focusing on the selling, consider monitoring the buying more. While an executive could sell their shares for any purpose (new car, house, college bills, etc.), those transactions don't give much context to their underlying opinion of the business. Buying shares, on the other hand, generally has one driver: confidence in the business. If you see a great deal of insider buying, consider it a good sign that those who know the business best are sure that the stock will rise.

In the end
It's important for investors to know what's going on with insider ownership at the companies they invest in, but it's more important that they take the raw buy/sell information and dig a little further to understand the motives behind the transactions. As a Foolish investor, you know that not everything can be taken at face value and sales of executives' shares is just another example.

To learn more about the most talked about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.


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