When directors purchase large numbers of shares in their own companies, it’s reassuring. There’s usually only one reason for directors to buy in bulk: they believe the shares are good — or at least reasonable — value, and they expect to make a decent return on their investments in due course.
Conversely, you might think big director sales are an indication that insiders believe the company’s shares are over-valued, and that it’s a good time to get out. However, things are a little more complicated when it comes to directors selling.
Let’s take a look at recent big director sales at HSBC Holdings (LSE: HSBA) (NYSE: HBSC.US), BT (LSE: BT-A) (NYSE: BT.US) and AO World (LSE: AO).
HSBC
Most specialist financial and broker websites have a convenient daily list of director dealings, showing the number of shares involved, the buy or sell price, and the total cost of purchase or proceeds from the sale. Last Friday, the following sales by HSBC directors appeared on such lists:
| Director | No. of shares | Price per share | Deal size |
| Stuart Gulliver (chief executive officer) | 42,912 | 561.24p | £240,839 |
| Iain Mackay (group finance director) | 21,608 | 561.24p | £121,273 |
| Marc Moses (group chief risk officer) | 22,460 | 561.24p | £126,055 |
Are these large sales by key executives a cause for concern? Don’t rely on the sort of summary information above, but go to the regulatory announcement made by the company itself.
In this case, you’ll find that HSBC’s directors had been awarded a much larger number of shares as part of their pay packages, and that the shares sold were to cover tax liabilities associated with those awards. This is common. The fact that HSBC’s directors retained the bulk of their new shares (thus increasing their personal stake in the company) can be seen as supportive of value in the company on a forward P/E of 10 and dividend yield of 6%.
BT
On the same day as the HSBC sales, a big sell at another prominent FTSE 100 company also appeared on the director dealings lists. BT group finance director Tony Chanmugam netted a whopping £1.8m by selling 400,000 shares at 442p a pop.
With BT’s shares trading at multi-year highs — albeit a forward P/E of 14 does not appear outrageously high — is Chanmugam’s mammoth sale a warning sign that the party may be over? It would seem not. For one thing, Chanmugam still holds well over half a million shares; and, for another, BT spokesperson Dan Thomas came out and said that the shares the finance director had sold were “to use for charitable work”.
Companies do sometimes give a reason for a large director sale. The credibility of the reason is a matter for your judgement. Blue-chip companies don’t generally play fast and loose in this area, in my experience, and a quick bit of googling shows that Chanmugam is the chairman of the Fars Chanmugam Charitable Trust, which works to improve the lives of disadvantaged children in Sri Lanka.
AO World
Another recent big director sale has come at FTSE 250 firm AO World, which was floated on the stock market this time last year. The chairman of the online white goods retailer, Richard Rose — who is also chairman-elect of troubled insurance outsourcer Quindell — sold 5,583,475 AO World shares at 180p a time, bagging himself just over £10m.
Unusually, in a separate regulatory announcement, AO World said Rose “retains a significant shareholding in the Company”, and chief executive John Roberts commented that the sale “will help to further increase liquidity and the number of shares in public hands. Richard remains committed to the Company, both as a shareholder and as its Chairman”.
Given that Rose’s sale represented almost nine-tenths of his shareholding, and liquidity doesn’t seem to have been a particular problem, AO World’s statement strikes me as somewhat ingenuous. The company’s shares dived on a profit warning last month, after which I thought the stock was still overvalued on an EV/EBITDA of 45x. To my mind, Rose’s share sale adds a further question mark about the prospects for investors in AO World at the current valuation.
