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Main Street Capital Stock's Big Insider Buying

By Jordan Wathen - Oct 6, 2014 at 7:52AM

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Main Street Capital insiders are snapping up shares of this high-yield stock. Should you follow suit?

Main Street Capital (MAIN -1.97%) insiders have recently been buying the company's stock hand over fist. Data from S&P Capital IQ suggests insiders are not only buying, but they're also increasing the rate at which they're snapping up shares.

Does insider buying matter?
Insider buying is evidence that people who are in the know -- those who run the company -- think a stock is cheap. But evidence doesn't make a conclusion. It's just one data point.

For a "jockey play" like Main Street Capital, insider ownership is perhaps more important than at other companies. As a business development company, Main Street makes investments on behalf of shareholders. If management has skin in the game by owning a substantial amount of stock, insiders have incentive to treat that money as if it were their own.

But there's more than meets the eye. Let's look a little deeper.

What's the source of the buying or selling?
Main Street Capital is required to pay out big dividends. Through 12 monthly dividends each year, it distributes virtually all of its income to shareholders. Many shareholders use a company-sponsored dividend reinvestment program to automatically reinvest the dividends as they're paid out.

The company's insiders are no different. In fact, each insider buy and sell listed the same reason: buys were from dividend reinvestments, and sells were to cover taxes. The table below summarizes insider buying and selling in the last quarter.

Action

Shares

Value

Stated Reason

Buying

22,894

$733,977

Dividend reinvestment program

Selling

9,272

$304,771

Withheld for taxes

Source: SEC Form 4 filings.

We can see from this table that insiders purchased 13,622 more shares than they sold. In dollars, insider buys tallied $429,206 more than insider sales.

We can also look at last-reported ownership stakes of some of the most important insiders, and see how their economic interests align with shareholders.

Person

Role

Shares (value)

Vincent Foster

Chief Executive Officer

1,471,364 ($45.6 million)

Dwayne Hyzak

Chief Financial Officer

254,887 ($7.9 million)

Curtis Hartman

Chief Credit Officer

197,243 ($6.1 million)

David Magdol

Chief Investment Officer

255,610 (7.9 million)

Source: Form 4 filings. Note that this table does not include indirectly owned shares. Vincent Foster, for example, manages trusts with equity stakes in the six figures for each of his daughters. Those shares are not included in the numbers above. Thus, if anything, the numbers above downplay each insider's true economic stake. Value is based on a share price of $31.

It's clear insiders have substantial stakes. And thanks to Main Street Capital's beefy dividend yields, insiders' purchases are massive when these dividends are reinvested.

Should you follow their lead?
Main Street Capital is truly a model for aligning the interests of shareholders and executives in the world of high-yield business development companies. Some of its C-suite roster earns more from monthly dividends than from salaries and bonus compensation.

Because insider buys are automatic as part of a dividend reinvestment program, I'm not sure there is much we can read into recent buying and selling data. Rather, we should take the long view and recognize that relative to its peers, Main Street Capital's managers have a lot of skin in the game.

With incentives so directly aligned, outside investors know that insiders have every reason to make decisions in the interests of all shareholders. That's not something you can say of most BDCs. And that substantial equity stake is one reason why I think investors trust that the management team will make decisions to benefit all shareholders, not just insiders.

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Stocks Mentioned

Main Street Capital Corporation Stock Quote
Main Street Capital Corporation
MAIN
$37.79 (-1.97%) $0.76

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