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Case Study: Insider Ownership Among Dividend Kings


Published by Nicholas McCullum on March 14th, 2017

Rising dividend payments and insider ownership are two characteristic traits of a shareholder-friendly stock.

When it comes to dividend increases, the Dividend Kings are the gold standard – these companies have 50+ years of consecutive dividend increases.

You can see all 19 Dividend Kings analyzed in detail here.

Given that Dividend Kings already exhibit one shareholder-friendly behavior (rising dividend payments), it would seem logical that these companies would also have high levels of insider ownership.
 

Click here to download a free Excel spreadsheet containing insider ownership information on five of the largest Dividend Kings.

This article will provide an analysis of the insider ownership of the five largest Dividend Kings:

In particular, this article will analyze the stock holdings of the CEOs of these five companies.

The Importance of Insider Ownership

Before diving into the executive ownership among Dividend Kings, it is critical to understand why insider ownership is beneficial for investors.

When company insiders (directors, executives, etc.) have large ownership stakes in the companies they operate, it sends two signals to the company’s investors (and the markets in general):

  1. Company management has faith in the business’ growth prospects
  2. Insiders will participate in the successes (and failures) of the underlying business.

Both imply that company management is incentivized to act in the best interest of its shareholders.

Further, shareholders can rest assured knowing that company management (the people most informed about the business) are confident in the company’s future.

There are many examples of shareholder-friendly stocks that have high levels of insider ownership.

One of the most notable is Warren Buffett’s Berkshire Hathaway (BRK.B) (BRK.A), a massive conglomerate with holdings in the insurance, railway, and manufacturing sector. Berkshire Hathaway also has a substantial, $100 billion+ investment portfolio managed primarily by the company’s CEO Warren Buffett.

You can see an analysis of Berkshire Hathaway’s top 20 high yield dividend stocks here.

While Berkshire does not pay a dividend, the company has one of the highest levels of insider ownership that I have ever seen.

Warren Buffett holds 38.2% of the company’s Class A common stock, which amounts to 308,261 shares worth ~$81 billion. The Oracle of Omaha also owns a smaller amount of Class B shares, which are worth much less (both from an economic and voting perspective).

This is a level of insider ownership that is nearly unmatched in a company of Berkshire’s size. However, relatively high levels of inside ownership are common among companies with shareholder-friendly management teams.

How to Find Information on Insider Ownership

Insider ownership is one of a variety of financial metrics held in company filings with the U.S. Securities & Exchange Commission (SEC).

Fortunately, information regarding insider ownership is held within one particular type of filing with the SEC, known as a ‘DEF 14A’ or an ‘Other definitive proxy statement.’ This makes finding insider ownership information simple, as there is only one filing to sift through.

You can find filings with the SEC by searching this database. You must first search for a company, and then for a type of filing.

If one was looking for insider ownership information about Apple (AAPL), you would first type the company’s name into the required field:

Company Name Apple

Next, identify the correct ‘Apple’ from the list that is returned. The search engine will return all companies with the word ‘Apple’ in their name, including unrelated entities such as Apple Blossom REIT, LLC.

This brings us to a list of all of Apple Inc’s SEC filings. To find the particular filing with insider ownership information, type ‘DEF 14A’ into the ‘Filing Type’ field.

EDGAR Search Results DEF 14A Apple

The SEC database provided above will sometimes be very particular about the name of a company that is searched.

For instance, a search for ‘Coca-Cola’ does not return the Coca-Cola Company (although it does return bottling entities like Coca-Cola European Partners (CCE)) but a search for ‘Coca Cola’ (with no hyphen) does.

Insider Ownership Among Dividend Kings

In this analysis, I will be moving between shares amounts to dollar value to express the insider ownership of the five largest Dividend Kings.

As such, I wanted to provide the share prices at which the comparison is being made, depicted below.

Stock Price

Source: Yahoo! Finance

These are the stock prices as of market close on March 10, 2017.

The first piece of insider ownership related data I will present is the number of shares that each of the company CEOs holds in their respective company.

Most of these executives have spent most of their career at the business they lead, which has given them plenty of time to accumulate shares.

Market Value of Company Stock Controlled by CEOs of the 5 Largest Dividend Kings (Owned and Via Options)

Source: Company filings available from the SEC

For Coca-Cola, I have listed both Muhtar Kent and James Quincey because Quincey will be succeeding Kent effective May 1, 2017. Forward-looking Coca-Cola investors will find his ownership stake to be just as important as the current CEO’s.

One noticeable trend from the above chart is that the more tenured CEOs have larger stock holdings.

Kent, close to retirement, holds a substantially larger number of KO shares than any of his peers hold in their respective companies. David Taylor has the lowest number of shares, which is understandable since his role as Procter & Gamble’s CEO only began in July 2016.

Though the share ownership data is interesting, it is not ideal because each company’s stock presents a different percent stake in the underlying business.

In other words, the nominal share count owned by these CEOs is not comparable because of the companies’ different stock prices.

Looking at the market value of these CEOs’ holdings is much more useful. This data is presented below.

Market Value of Company Stock Controlled by CEOs of the 5 Largest Dividend Kings (Owned and Via Options)

Source: Company filings available from the SEC

Notice that comparing market value (instead of the number of shares) reveals less discrepancy between the insider ownership of these companies. Ian Cook owns more than half as many dollars worth of CL as Muhtar Kent owns KO, but Cook owns only ~30% as many shares because of CL’s higher stock price.

Moving on, each of these five companies has stock ownership requirements for the CEOs (along with other executives).

The requirement of insider ownership is another shareholder-friendly trait that should be appreciated by investors, as it forces an alignment of interest between management and shareholders.

The CEO stock ownership requirements for these five companies can be seen below, expressed as a multiple of the CEO’s base salary.

Stock Ownership Requirement

Source: Company filings available from the SEC

The stock ownership requirements are either 6x or 8x, depending on the company. Keep in mind that base salary is only a portion of the total compensation packages of these executives.

These stock ownership requirements are imprecise measurements unless the CEO base salaries are known. These figures are shown below.

CEO Base Salary

Source: Company filings available from the SEC

The base salary of each of these CEOs is in the ~$1.3M-$1.6M range, with Johnson & Johnson’s CEO Alex Gorsky taking home the most base salary by a narrow margin (~$13k).

Based on these base salaries and the stock holdings of these CEOs, each insider holds a great deal more stock than they are required to. In fact, each CEO holds a multiple of their required stock ownership, which can be seen in the following diagram.

Multiple of Ownership Requirement Achieved

The CEOs of the five largest Dividend Kings each hold between 5x and 48x the amount of stock that is required by their employer.

Without a doubt, these business leaders are making strong efforts to align their interests with those of their shareholders.

Final Thoughts

The Dividend Kings are the best-of-the-best when it comes to dividend longevity.

50+ years of consecutive dividend increases show that these companies are dedicated to acting in the best interest of their shareholders.

As such, it is no surprise that the executives of these companies are major stakeholders in the businesses they run. These businesses’ CEOs hold millions of dollars of company stock, well above their company-mandated ownership requirements.

This aligns the interests of management and shareholders, which will result in more shareholder-friendly decision-making (and better total returns) over the long run.


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