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Dividend Stock Advisor

3 Stocks With Insider Buying

By David Peltier | 08/30/16 - 11:46 AM EDT

We have the room to add a couple of names to the model portfolio and one characteristic we look for in a potential new holding is insider buying. Arguably, company executives and directors have more knowledge about a company's current health and future potential. There are many reasons why company insiders may sell a stock, but there's really only one reason they purchase on the open market -- to make money.

With that in mind, we found three stocks that offer a dividend north of 3% and have reported insider buying in the past month. Below we analyze each name's investment potential.

Up first is Caterpillar (CAT:NYSE), which recently changed hands around $82.52 and offers a 3.7% dividend yield. On Aug. 2, it was reported that board member Dennis Muilenburg bought about $160,000 worth of the company on the open market.

After increasing its dividend in the June quarter for six straight years, the machinery manufacturer only maintained its payout of $0.77 a share (3.7% yield) earlier this summer. In addition, management lowered its full-year profit guidance last month to $3.55 a share.

That means Caterpillar will have to pay out 86% of its earnings to cover the dividend, which is well above our usual threshold of 50%. While free cash flow has averaged 33% higher than reported net income over the past three years, profits are expected to remain flat in 2017 in spite of aggressive cost-cutting efforts from management. The company also has $7.66 billion of debt coming due by the end of 2017.

The stock has gained 21% year to date, but we believe readers should not chase Caterpillar at current levels, as there are names in the dividend universe with higher earnings coverage and the potential to boost their dividend.

Next, Flowers Foods (FLO:NYSE) is a packaged-food producer that recently changed hands around $15.13 and pays a quarterly dividend of $0.16 a share (4.2% yield). Investors at the close of today's trading will qualify for the next payment on Sept. 16. Four members of the board of directors have announced the purchase of a combined 55,800 shares of the company on the open market this month.

Management has steadily raised the dividend since initiating a payout in 2002 and the current rate is equal to 65% of expected 2017 earnings of $0.98 a share. Flowers cut earnings guidance earlier this month and also disclosed it is subject to a fair-labor review by the U.S. Department of Labor.

The shares have lost 29% year to date and while the recent insider buying could suggest the worst is behind the company, we'd need to see a solid quarter or two from management before we could send the all-clear signal.

Finally, Western Refining (WNR:NYSE) recently changed hands around $24.59 and offers a quarterly dividend of $0.38 a share (6.2% yield). The chief executive officer and chairman of the board have combined to purchase 425,000 shares of the company on the open market this month.

Management has boosted the dividend eight times in the past five years, but the current rate will not be covered by expected 2016 earnings of $1.19 a share. Western's bonds are also rated a full five levels below investment grade.

While the energy refining sector had been resilient to lower prices the past several quarters, an ongoing supply glut has decimated margins this year. Even with the company's earnings expected to rebound 44% in 2017, the stock has lost 30% year to date and we believe readers should avoid chasing the above-average yield.

Regards,

David S. Peltier

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