CEOs are taking advantage of the market surge to quietly liquidate their holdings.
Insiders at U.S. companies have sold off $5.7 billion in stock this month, marking the highest amount for any September in the last decade, as reported by TrimTabs Investment Research’s analysis of regulatory filings.
This isn’t a new phenomenon. Insiders, including high-ranking corporate officials and directors, also sold shares at the quickest rate in 10 years during August, according to TrimTabs.
The significance of this selling is amplified by the fact that it coincided with a strong market recovery following a sharp downturn earlier in 2018. Driven by tax reforms and a robust economy, the Dow recently achieved its first record high since January.
Many corporate insiders have a substantial portion of their wealth tied to stock prices, suggesting that their actions could simply be a cautious approach. The existing bull market, already the longest in history, cannot persist indefinitely.
“It’s very sensible for them to sell some shares, regardless of their affection for the stock,” noted Joe Saluzzi, co-partner at Themis Trading. “This doesn’t necessarily imply they foresee issues.”
TrimTabs does not specify how many of these insider transactions were pre-scheduled. The SEC permits executives to arrange stock sales in advance, thus avoiding potential accusations of insider trading.
While the leaders of Corporate America are cashing out, they are taking a drastically different approach with the funds of shareholders.
In 2018, U.S. public companies have authorized an astonishing $827.4 billion in stock buybacks—setting a new record for any year, as per TrimTabs. Apple (AAPL) alone revealed plans for $100 billion in buybacks last quarter.
This surge in buybacks has been interpreted by investors as a gauge of confidence among CEOs.
“Insiders aren’t initiating buybacks because they believe the stocks are undervalued,” explained David Santschi, director of liquidity research at TrimTabs. “The actions they are taking with shareholder funds versus their own are distinctly different.”
Companies often use buybacks as a means to return surplus cash to shareholders. These share repurchases benefit investors—and executives who are primarily compensated in stock—by creating sustained demand that typically elevates prices. Additionally, buybacks artificially boost earnings per share by reducing the total number of shares available.
Corporate America is seeing record profits due to a strong economy and significant tax reductions as a result of the Republican tax overhaul, which slashed the corporate tax rate from 35% to 21% and provided concessions on foreign profits brought back to the U.S.
This tax benefit has allowed companies to invest more in job-generating projects like new equipment and research endeavors. However, the pace of buybacks is outpacing other expenditures. In fact, Goldman Sachs determined that buybacks are claiming the largest portion of cash spending by S&P 500 firms for the first time in a decade.
Given the recent increase in buybacks, Saluzzi remarked that it would be unusual for insiders to be quickly selling shares outside of prearranged sales.
“One must be cautious and scrutinize the current situation,” Saluzzi stated.
UJ (New York) First published September 26, 2018: 12:42 PM ET
