Inside ownership is a measure of the amount of stock owned by directors or senior officers of a company. Inside ownership is generally considered a positive investment criterion because it implies that the decision-makers at a company have skin in the game. Insider buying, a metric that reports recent purchases by insiders, is also a strong market signal because it could indicate that top management believes company stock is currently cheap. However, inside ownership could also pose major issues, especially when the insiders own a significant portion of the company as a result of having built it.
Sell
One look at Dell Inc. (NASDAQ:DELL) quickly shows the issues related to strong inside ownership. Michael Dell, the founder and billionaire behind Dell Inc. (NASDAQ:DELL), recently decided to take his company private. Dell stock has been stumbling for years, and the company wants to reinvent itself and move away from the personal computing business, a transition successfully executed by International Business Machines Corp. (NYSE:IBM). However, this transition will be costly, so Dell Inc. (NASDAQ:DELL) wants to take the company private so transformation can be done outside of the public eye.
The problem is the price offered by Dell Inc. (NASDAQ:DELL) represented a small premium over the stock price prior to the announcement. At $13.65, many of Dell’s largest institutional holders indicated that they would not vote in favor of the buyout. Michael Dell’s 12% ownership stake in the company immediately came into question, as many investors accused him of trying to steal the company from current shareholders. The low bid caught the attention of activist investor, Carl Icahn, who has made his own aggressive offer for the company. The future of Dell Inc. (NASDAQ:DELL) is now very uncertain, and the company has created a giant headache for itself. The fact that the buyout was led by the company’s biggest holder certainly did not help Dell Inc. (NASDAQ:DELL) win investors with a $13.65 bid.
Buy
Inside ownership by the founders of the company can also provide benefits for shareholders. World Wrestling Entertainment, Inc. (NYSE:WWE), the globally-recognized media company, shows how shareholders can profit from a family business. The McMahon family created a two-class share system that allows them to maintain control of nearly 82% of the voting stock. While this may appear concerning because investors voting rights are meaningless, it also creates a problem for the McMahon family that can serve investors well.
It is clear that the McMahon family wants to maintain control of the company. As a large part of their wealth is tied up in company stock, and selling stock and diluting their ownership is not an option, they must find other ways to get money out of the company. World Wrestling Entertainment, Inc. (NYSE:WWE) has consistently paid a very strong dividend, and sports a current yield of 5.17%. While not explicit, this is clearly how the McMahon family is transferring wealth to their pockets without diluting their ownership. After all, it is the McMahon family who is setting dividend policy.
World Wrestling Entertainment, Inc. (NYSE:WWE) offers a great yield, if you are comfortable with the McMahon family exercising control over the company. The family’s need to maintain complete voting control will allow investors to reap the gains of a strong dividend yield and payout ratio.
Foolish Bottom Line
Inside ownership poses an interesting scenario for investors. In the case of Dell, Michael Dell’s ownership stake only served to undermine his attempt to take the company private. The issues surrounding the company will continue to create issues as the fate of Dell is played out in the public eye. Buying Dell now would be a gamble on the outcome of this debacle, not an investment.
If Dell is able to change its business model and do away with its personal computing segment, it may warrant a reevaluation as an investment opportunity. International Business Machines Corp. (NYSE:IBM) sold its personal computing business in 2005, and since then, the stock has increased at an annual rate of 13.08% from its highest closing price in 2005. The company remains an attractive investment opportunity at a current P/E of 14.10, below the S&P’s current P/E of approximately 18, and well below the industry average of 26.86.
World Wrestling Entertainment, Inc. (NYSE:WWE) offers an attractive opportunity for investors looking for a strong yield and a company that will continue to maintain a strong payout ratio. The company has a very loyal fan base and a globally recognized brand. While the company’s recent first quarter results were disappointing due to issues with its movie production segment, the company remains a strong investment opportunity.
The article Inside Ownership: Should You Buy Or Sell? originally appeared on Fool.com is written by John Timmes.
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