One Stock Against the Wind

Is Windstream (NYSE: WIN) headed higher, or lower? That's the question we ask when we evaluate insider buying and selling. We ask because how executives spend their paychecks is often a reflection of what they think of their companies' prospects.

Of course, not all buys are equal. According to two decades' worth of research from Dr. H. Nejat Seyhun compiled in his book Investment Intelligence from Insider Trading, buying is most predictive when it (a) comes from the CEO or other top-level executive, and (b) it's done in bulk. Seyhun found buys from 10,000 to 100,000 shares to be most informative.

How do Windstream's managers measure up against Seyhun's benchmarks over the past year? See for yourself:

Sources Form 4 Oracle, Capital IQ, and Motley Fool CAPS. (Data current as of Nov. 10.)
*Open market sales and purchases only.

What we're tracking here, and why
Insider buying data can be confusing. Here, I'm concentrating only on buying and selling conducted in the open market. With most of these transactions, insiders control the timing. Other times they're buying or selling under the purview of a 10b5-1 plan. Either way, personal holdings are being bought and sold.

Those personal holdings matter the most -- they're the shares executives hold for investment, rather than compensation. Employee stock options are different; they're compensatory in the purest sense. I've stripped out options-related buying and selling from the calculations you see above.

The Foolish view: bearish
For many, Windstream is no doubt tempting. Who wouldn't love to own shares of a company whose 7.6% dividend puts it within spitting distance of the market's top-yielding stocks?

The answer, of course, is that most of us would. Outsized dividends tend to lead outsized stocks returns when they're coupled with healthy dollops of profit and cash flow growth. Windstream's problem is that it has had to buy growth through acquisitions.

Yet the strategy is working. Windstream produces double-digit returns on capital and hundreds of millions in free cash flow annually, more than enough to fund its dividend and still pay down debt. For now, at least.

"Their model works for now due to their cash position. They can finance the higher dividend, but if their earnings suffer later or decline, this strategy could falter, resulting in them having to cut their dividend. For the short term -- 1 year or less -- they are a good pick in comparison to the S&P 500," Foolish investor noojin3 wrote in August.

If only insiders behaved like this were true. Treasurer Robert Clancy has been the lone seller of shares over the past year, but the bulk of his selling has come at prices lower than the stock trades for now. Buyers were last seen at less than $11 per share. I'd rather they returned before committing capital or a Motley Fool CAPS pick to Windstream.

Plus, even if cash is flowing now, the emergence of residential VoIP services from national (or even international) providers could dam the works and make funding future acquisitions difficult.

Do you agree? Disagree? Log into CAPS today and tell us how you would rate Windstream. You can also add the stock to your watchlist.

And if you want me to take a Foolish peek at the insider action of your favorite stock, email me here or use the comments box below. I'll write this column as often as you, our readers, demand.