FTSE 100 director deals — where exec-level insiders buy shares in their own company — aren’t always a sign of value. Most UK shares are between 35% and 50% cheaper than they were a month ago, that much is true.
But stock market history is littered with examples where directors have thrown down a wedge of cash to encourage investors to back their company. Then weeks later the business throws in the towel and goes bust.
However, when directors make multi-million pound deals in the FTSE 100 companies I already like? With well-covered dividends, large profits, and low debt? That looks like a buy signal to me.
Why do directors deal?
Nobody has a better idea about the financial health of a FTSE 100 company than the directors running it. Insiders have access to financial reports we will never see. If the long-term outlook is good and current events have the share price lower than fair value, they will buy in.
Among the biggest FTSE 100 buys in recent weeks is a £999,978 deal by Laxman Narasimhan, chief exec of household cleaning product seller Reckitt Benckiser (LSE:RB).
In an era of hand-sanitiser price gouging, toilet roll hoarding, and baby wipe-shortages, shares in this consumer staples business might seem an obvious choice for forward-thinking investors. One note of caution, though. After-tax profits and basic earnings per share were considerably down in the last set of full-year results. I’m not convinced by RB’s balance sheet, even at a price-to-earnings ratio of 18 and a dividend yield of 2.8%. Its PEG ratio is far beyond what I consider to be a value investment, too.
Non-exec Lloyds Bank (LSE:LLOY) director Lord James Lupton spent £830,000 on shares on 17 March.
I know LLOY is the most-traded retail share on the FTSE 100 by a long shot. It’s just personal preference but I’m not invested in any banks. With a recession coming and interest rates now slashed to the lowest in the Bank of England’s 300-year history, I don’t see major profits on the horizon.
Of the high-street banks, Lloyds is the most UK-exposed with the least overseas income, too. If the British economy is in the toilet by the end of the year, Lloyds will be hurt the most. And if I didn’t think Lloyds was worth my money at 60p, I certainly don’t think its a buy just because it’s half the price.
Now, this is more my speed. 3i Group (LSE:III) chief exec and finance director Simon Borrows and Julia Wilson bought a total of £1,019,232 shares on 27 March. This private equity group has been investing in early-stage growth companies since the late 1940s.
Lasting through six UK recessions gives me confidence 3i will weather this latest economic storm.
It has consistently increased dividends over the last decade from 3p per share to 30p per share. It is trading at a 12% discount to net asset value, and has all the dividend cover in the world.
Compare that to other FTSE 100 favourites like Royal Dutch Shell. The oil major is dramatically slashing costs right now and had a dividend cover of just 1.05 last year. 3i’s dividend is covered more than 3.9 times by earnings.
There will be plenty of income investors out there seeing FTSE 100 dividends cut or suspended. Looking for a safer play in times of turmoil is just good business sense.
The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.