Insider buying dries up defying $275 billion of buybacks

American companies have seldom spent more money than they are now buying back shares. The same can't be said for their executives.

A total of 7,181 insiders bought their own stock this year through Sept. 12 and 23,323 sold shares, according to data compiled by Bloomberg and Washington Service. The ratio of buys to sells is near the lowest since 2000. At the same time, corporate repurchases reached $275 billion in the first half of the year, the second busiest since S&P Dow Jones Indices began tracking the data in 1998.

Share purchases by executives are becoming rarer after seven straight quarters of advances pushed valuations in the Standard & Poor's 500 Index to a four-year high. While companies are pouring money into their own stock because they have nothing better to do with it, officers and directors aren't -- and that's a bearish signal for share prices, said Brad McMillan, chief investment officer at Commonwealth Financial Network.

"It doesn't say anything very good about the growth prospect for the business," McMillan, whose firm oversees $86 billion, said in a phone interview on Sept. 18 from Waltham, Massachusetts. "Who would know the business better than an executive in the middle of it? Even executives are buying on the corporate level, their hearts are not in it personally."

Insiders buying stock have dropped 8 percent from a year ago, poised for the fewest in more than a decade, according to data compiled by Bloomberg and Bethesda, Maryland-based Washington Service. Monsanto Co. and Cisco Systems Inc. are among companies whose executives have done less buying even as corporate repurchases increased.

Record Highs

Gains in the S&P 500 including last week's 1.3 percent advance have pushed the benchmark index for U.S. equities to about 18.2 times annual earnings, the highest since March 2010, data compiled by Bloomberg show. The gauge has closed at records more than 30 times in 2014 and posted annual returns of 24.4 percent since March 2009, compared with 26.3 percent in the last five years of the 1990s Internet bubble.

"Insiders are reacting to stocks, in general, at all-time highs," David Kahn, managing director at Convergent Wealth Advisors, which oversees about $8.5 billion, said in an interview on Sept. 18. "Share repurchases represent other people's money, which is much easier to spend. Corporate cash is exploding."

S&P 500 futures lost 0.5 percent at 8:22 a.m. in London.

Trailing Growth

Economic growth has yet to catch up with the pace of the dot-com bull market. Gross domestic product has expanded on average 2.1 percent a quarter since 2009, data compiled by Bloomberg show. During the last 21 quarters of the 1990s rally, GDP growth averaged 4 percent.

"There is a disconnect between what the market is doing and the economy is doing," Terry Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., said by phone on Sept. 15. "If management doesn't feel confident enough about the future, they're going to be net sellers."

With sales growth running at an average 2.6 percent a quarter in the past two years and cash balances exceeding $1 trillion, chief executive officers are turning to stock buybacks to bolster per-share profit. More than one-fifth of S&P 500 companies cut their share count by at least 4 percent in the first half, said Howard Silverblatt, an index analyst at S&P.

Executives' Preference

"While we think an appropriate way to deploy excessive cash is through increasing dividends, many executives prefer cash buybacks because of the improvement to earnings per share that could be created," Kristina Hooper, a U.S. investment strategist at Allianz Global Investors in New York, said in a phone interview on Sept. 18. The firm oversees $511 billion. The lost interest among executives "is likely concern about valuations, or at least a lack of seeing screaming buys as they have been," she said.

Hugh Grant, Monsanto's chairman and CEO, sold 44,179 shares in the world's largest seed producer in January. That's his biggest disposal in the open market since 2004, excluding options-related and automatic sales, according to InsiderInsights.com, which analyzes insider transactions.In June, Monsanto announced a $10 billion stock buyback plan.

Even after the selling, Grant still owns more than four times his stock ownership requirement, according to Sara Miller, a Monsanto spokeswoman.

Stock Disposal

Cisco in November announced $15 billion in buybacks and said last month that it plans to return a "minimum" 50 percent of its free cash flow to shareholders. At the same time, Chief Financial Officer Frank Calderoni got rid of 120,000 shares on Sept. 17, his first disposal since 2008 excluding options- related and automatic sales, data compiled by InsiderInsights.com show.

"Many people (including Cisco executives) follow widespread financial advice to diversify their personal investment portfolios," John Earnhart, a spokesman for Cisco, wrote in an e-mail.

The retreat of insiders doesn't necessarily send a warning signal, said David Chalupnik, the head of equities at Nuveen Asset Management in Minneapolis.

"I don't think it's them saying that their business isn't that good or they expect the market go down," Chalupnik said by phone on Sept. 18. His firm oversees about $127 billion. "These corporate executives have made a lot of money over the five years and their stocks have done really well. They're not willing to put more money in or they're looking to diversify because they probably now have quite a bit of their money in their own stock."

'Powerful Signal'

Past insider transactions have proved prescient. Company officials turned pessimistic on their own stock in October 2010, with about seven insiders selling for every two that bought shares. The ratio exceeded three for five straight months, the longest stretch in a decade. The S&P 500 peaked in April 2011 and slumped 19 percent through October, the closest the market has come to ending the bull market.

Executives became optimistic at the end of the financial crisis six years ago. The number of buyers almost tripled that of sellers in November 2008 and stayed higher in each of the following four months. The S&P 500 bottomed at a 12-year low in March 2009.

"Insiders are very savvy about trading their stocks," Jim O'Donnell, who oversees about $6 billion as chief investment officer at Forward Management LLC in San Francisco, said in a phone interview on Sept. 18. "When you see the entire herd of insiders moving out, that's a powerful signal. They may be early, but they're always right."