Want to know where a company is headed? Who better to ask than the people running the company! This is one reason that insider ownership should be near the top of your checklist, and why it is Fool co-founder Tom Gardner's favorite metric. Below, find out why insider ownership matters, and check out a few stocks in which insiders are heavily invested.
It's all about incentives
If executives own plenty of shares, you can bet that their interests are aligned with those of the shareholders (because they are shareholders!). And not only does owning shares show faith in the company from those who know it best, it incentivizes management to increase shareholder value and to work hard to make the business better.
When analyzing insider ownership, be careful to note that it's much easier for executives at small companies to own a higher percentage of the business. This is why when looking at a giant company with seemingly low insider ownership, you have to compare the number of shares executives own relative to their annual compensation. A good guide is for executives to own shares valued at three times what they make in a year. You can find both insider ownership and executive compensation in a company's proxy statement (filed with the SEC as a DEF 14A).
Now, here are a few stocks in which insiders are deeply invested.
Best known as the parent company of U-Haul, which happily puts drivers behind the wheel of trucks up to 26 feet long, Amerco also owns two insurance companies and a real estate firm. Three of founder Sam Shoen's sons now have leadership positions within the company and own 55.6% of the total shares, largely through a trust. Due in part to this large stake owned by the family, Amerco's stock survived its bankruptcy filing in 2003, as the company used the Chapter 11 proceeding to restructure its debt.
Speedway owns racetracks around the country, and founder O. Bruton Smith owns almost 70% of it through personal shares and those held by his majority-owned Sonic Financial. Benefiting both Smith and other stockholders, Speedway bought back 194,000 shares last year, part of over 3.5 million shares bought back since 2005. Additionally, dividend payouts have increased since the first dividend in 2002, now rewarding shareholders with a yield of over 4%.
CEO Polys Hajioannou and his family own almost 65% of this Greek shipper through control of Vorini Holdings. While Fool Brendan Byrnes dislikes the beaten-down industry, there's no question that investors are tempted by an over 8% dividend yield. However, even though Hajioannou is deeply invested in his company, the industry's oversupply problem looks like a long-term threat. This might be one instance in which shareholders will share pain instead of gain with invested management.
CEO Min Kao and family own almost 23% of this GPS maker. While its dividend has jumped around and now requires shareholder approval under Swiss law (Garmin moved its incorporation to Switzerland in 2010), the company isn't afraid to dole out cash to shareholders -- which, of course, includes Kao. The current dividend yields 3.4%, and the company expects to continue paying this throughout 2012. Fools are divided on Garmin: Tamara Rutter likes the company's direction, while Jeremy Bowman believes it is lost in the woods.
Founder Walter Zable and his son own more than 38% of Cubic. The 95-year-old Zable founded the company, which provides military support services and training systems as well as fare collection systems for public transit authorities, back in 1951. Cubic has paid out a dividend consecutively since 1971, and just increased the semiannual dividend by 33%. With an astounding $3.18 billion backlog, including a recently signed $454 million contract with Chicago Transportation Authority to build and run its fare system, the Zables run the company in a manner that preserves and grows shareholder value.
Don't wear blinders!
Even though insider ownership aligns management with shareholders, it should be considered alongside other measures of a business's health and prospects. Unfortunately, there's just no replacement for digging through the balance sheet and forecasting where an industry is headed.
For one stock that sports high insider ownership and solid financials while gobbling up a growing market, read our free report: "The Motley Fool's Top Stock for 2012."
Fool contributor Dan Newman owns 100% of his portfolio. He also holds no shares of the companies mentioned above. Follow him @TMFHelloNewman. Motley Fool newsletter services have recommended buying shares of Cubic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.