Investment tip-offs from management.

Here are 4 ways executives let you know business is good and company stocks may be headed upward

PSST. WANT A HOT STOCK TIP? LOOKING for the scoop on what's going on in the corporate boardroom? You'll be surprised to know that company officials from Maine to Mexico are slipping investors inside information daily, literally cluing in everyone and their neighbor on how things are at corporate headquarters.

No, we're not talking about the kind of stuff that got Michael Milken and Ivan Boesky outfitted in striped suits (and we're not talking pinstripes, either). High jinks of that kind--trading on company-specific stock information not publicly available to amass huge profits--are not only strictly forbidden by the Securities and Exchange Commission, they'll likely land you behind bars.

But there are legal ways for you to get in on the action. Experts will tell you that companies tip investors off constantly. Know the signs, they say, and you'll know the many ways to profit in the stock market.

Start with insider buying and selling. The law allows corporate executives to trade shares all the time. Top executives from the chairman down can buy or sell their company's stock by exercising options or swapping shares for cash on the open market, just as long as they tell the SEC what they're doing. And, these same SEC records are available to all comers. Follow management's trades, and you'll have a pretty good idea of what they know and where they think their stock is heading.

That's not all. There are a number of other signs savvy investors can use to peek into the minds of the head honchos. Stock splits, buybacks and dividend increases all send a message to the market, one that is often good to heed. And to top it all off, the information is legal, and readily available to investors with just a minimal amount of work. Here, then, is how to put your ear to the ground and your portfolio to work.

TIP #1: INSIDER TRADING

It's only logical that the folks at headquarters will have a pretty good idea of what's going on at their company. They're swapping memos daily. They're keeping an eye on the competitors. They're looking up and down at sales and profit figures all day.

Within the limits of the law, those same insiders--officers and directors--rely on much of that in-depth knowledge when they buy or sell company shares. If business is good, you're likely to see them snapping up their stock. If things look rocky or if their stock looks a little overpriced, it's not uncommon to see the same well-informed officials selling shares.

In fact, insider buying is such a strong signal that some money managers say they won't invest in a stock unless they see management actively investing in its own company's shares. That's because bosses, even those raking in six- and seven-figure salaries, are strangely like the rest of us: they're not investing to lose money. And executives stocking up on their company's shares aren't merely looking for their investment to appreciate--they're in a position to help it do so.

That's important for Edgar Lomax Value Fund portfolio manager Randall Eley. Eley may use a good many criteria when he screens the market for stocks, but at the end of the day he likes to see insider ownership as high as 3%-4% in large-cap companies and 10% or more in smaller companies. "Management then has to think like owners and concentrate on enhancing value for all shareholders," he says.

Look at the market and you'll see that a number of stocks have moved up after their management purchased shares. Last year, laboratory equipment maker Beckman Coulter (formerly Beckman Instrument) (NYSE: BEC) was under pressure, and its stock sank as low as $38 a share. Even though the company stock had a bad case of the doldrums, executives weren't fazed: many bought up shares with a vengeance. More importantly, as the stock rose in value to the $40s earlier this year, the same group of bosses continued to buy aggressively. As of press time, the stock had risen to $58 share.

By the same logic, insider selling can often signal investors that a company's shares are in for some rough trekking. Don't rush to conclusions, though. Executives are often paid in stock options, and can sell their shares for a myriad of financial-planning reasons--say, to buy a new house, finance their children's education or purchase a new Range Rover.

There are times, however, when insider selling can raise a red flag. Earlier this year, news reports in the major daily papers questioned why Henry Silverman, the CEO of consumer services giant Cendant Corp. (NYSE:CD), did not actually hold stock certificates in the company when it announced that Cendant had found accounting problems with its merger with CUC International Inc. on April 15. When Cendant later announced that CUC was fraught with trouble, its stock promptly lost 47%. Before the announcement, Silverman had exercised 1.7 million in options in February as part of a previously announced plan in 1997 to exercise up to 5% annually or 1.5% per quarter of his 46.5 million in options according to company resources. "My intention to realize a very small portion of the same gains other shareholders have realized for personal financial planning reasons should not be viewed as anything more than exactly that," noted Silverman in a company release.

Tracking insider ownership is easy. For one, a company is required to list insider ownership in its 10-K, and annual report filed with the SEC. Check online at www.sec.gov/edgarbp.htm for 10-Ks and other SEC forms. Then, when an insider buys or sells shares, he or she is required to file a document called a Form 4 with the SEC. Form 4 filings are reported in financial publications including Barron's, The Wall Street Journal and Individual Investor magazine, many of which are available at the local library. The three also regularly publish stories on insider activity, along with lists of companies with recent insider transactions. On the Web, you'll also find insider data on several sites for free, including www.insidertrader.com. Search engine Yahoo! (www.yahoo.com) also offers data provided by CDA/Investnet, a Rockville, Maryland, company that specializes in insider transactions.

TIP #2: LOOK FOR DIVIDENDS

There's one catch to investing in stocks. You can hold shares through thick and thin, weather a crash or rejoice over a bull market. But no matter what happens, you typically don't get a dime until you actually sell your stake.

There's one way a company can put a little money in your hands and make its stock more like your trusty bank account: offer a dividend. Dividends are essentially a company's agreement to pay you--usually each quarter--a sum of money for each share you own. As a source of steady, reliable income, dividends act almost like the interest a bank would pay you.

Here's an example. If you own 100 shares of Walt Disney Co. (NYSE: DIS), you'd receive an annual dividend of 63 cents a share or a total of $63. Payments of $15.75 would be made every three months. In terms of yield--the percentage of the stock's price paid out in dividends calculated by dividing the annual dividend by the share price--Disney's payout currently stands at 0.2%.

A dividend is more than a way for the CEO to share the wealth with investors. It also allows Wall Street a peek at a company's corporate health. A consistent, rising dividend shows several things. First off, it's an indication that a company is generating enough cash to cover the quarterly payments to shareholders. It's also a sign that management is confident of future growth and knows that profits aren't about to dry up anytime soon. "If you have a company that increases its dividend steadily and consistently, you can be sure it's enjoying great earnings growth," says Joseph Lisanti, senior editor of Standard & Poor's investment advisory newsletter, The Outlook. "Dividends are real. You can't fake them, and unless you have the earnings growth, you can't pay [one]."

It's not surprising that some of the biggest, most established firms have a history of rising dividend payments. General Electric Co. (NYSE: GE), which has paid out an uninterrupted dividend for almost a century, currently has a dividend of $1.20 a share, for a yield of 1.4%. Pfizer Inc. (NYSE: PFE), which has paid a dividend every year since 1901, recently boosted its dividend for the 31st consecutive year. Pfizer's dividend of 76 cents a share produces a yield of 0.7%. Lisanti says Fannie Mae (NYSE: FNM
FNM Free National Movement (Bahamas)
FNM Foot and Mouth ) and Abbott Laboratories (NYSE: ABT) are also companies with long histories of rising dividends. Abbott Labs pays 60 cents a share in dividends, yielding 1.6%. Fannie Mae, meanwhile, pays 96 cents a share a year, and also yields 1.6%.

There's another benefit to shareholders. Because dividend-paying firms spread their profits around and generate regular income for shareholders, their shares are generally less volatile than those of companies that don't give dividends. They also tend to suffer less than other stocks during a market downturn.

These days, it's easy to get the impression that corporate generosity has all but dried up. Not so long ago, electric utilities, telephone companies and other industrial giants paid yields of 4%-6% annually. But because stocks have charged further and further upward over the past three years, dividends have lost much of their luster. The yield for the S&P 500 has slipped to around 1.4%; historically, the figure has averaged about 4.5%, says Joseph Tigue, managing editor at The Outlook.

So what does it all mean? Since yields are based on a fixed dividend, they're seen as a gauge of a stock's value. A high yield (a dividend that seems large in comparison to a stock's price) can indicate an undervalued stock, one that investors haven't yet fully appreciated. A low yield can signal that a stock's price has risen quite a bit. It might also mean that the stock is overvalued.

Current low yields have market observers concerned that a correction or steep drop in stock prices might be on the horizon. Tigue says that might be a bit overplayed, though, since many companies have opted for acquisitions and buybacks instead of dividend increases.

Eley says he prefers larger companies to pay dividends rather than start-ups or smaller corporations just making a name for themselves. "Usually, with smaller companies we like to see management keep the money and reinvest it in the business," he says. But, for large companies, he says, a dividend "enforces a discipline on management not to make the mistake of using excess cash inefficiently, such as making acquisitions at prices that are too high."

S&P's Web site (www.personal wealth.com) provides information on investing in individual stocks with good dividend records. Value Line sheets, often at your local library, also yields, as does the and even your local newspaper.

TIP #3: STOCK SPLITS

Another way companies can push their share price is to declare a stock split--that is, give out a certain number of shares to holders for each share they currently own. Splits usually take place after a company's stock price reaches a certain level. Microsoft Corp. (Nasdaq: MSFT) has had seven stock splits since it went public in March 1986, the latest being a 2-for-1 split taking place this past February. Owners received one new Microsoft share for each they owned. Microsoft's share price, meanwhile was halved.

So, why all the fuss? Some advisors say splits aren't that big of a deal, equating them with cutting a pie in sixteen slices instead of eight. You have the same peach cobbler, it's only divided up into more pieces. And a split doesn't necessarily throw any signs to shareholders that business is doing better or worse.

Still, share prices tend to scoot upward the minute a split is announced. One reason lies in liquidity: just how many holders are eager to buy or sell shares at any given time. Splits reduce share prices. In turn, that attracts many more small investors who might be frightened to buy into a high-priced stock. The increase in demand relative to supply helps inch a stock's price upward. For example, Cisco Systems, the computer networking company, announced a 3-for-2 split that went into effect last December when its shares were near $80 each. The stock, priced at $50 after the split, has since risen back to the $80-$90-a-share range.

Stock splits are often announced along with a dividend increase. In June, Disney declared a 3-for-1 stock split, announced a buyback and increased its dividend. Add that to the fact that earnings were better than expected--Disney hit a 52-week high of over $128 a share.

Take a look at Yahoo's split calendar (www.quote.yahoo.com). It details which companies are dividing up shares and when.

TIP #4: CORPORATE BUYBACKS

Buybacks aren't complicated: they're programs that companies set up to repurchase their own shares. The shares are then retired, that is, taken off the market for good. A company that buys back its shares has less stock floating out on the market, and that cuts supply relative to demand. And with fewer shares outstanding and demand constant, there tends to be upward pressure pushing a stock's price higher.

Experts are generally bullish on buybacks. A buyback is often a sign that a company's management thinks its stock is a bargain--in fact, so undervalued that management would rather use its profits to buy its own stock rather than use the money for other reasons, such as an acquisition. It's also a sign that business is good. "If a company has the cash to buy back stock, it shows good cash flow," says William Thomason, director of portfolio management at Parnassus Investments in San Francisco. "They have confidence in the company and the industry."

According to Securities Data Co., a research firm in Newark, New Jersey, 549 transactions involving the repurchase of $76.7 billion worth of stock had occurred through the first six months of this year. Studies have shown that companies that repurchase their stock tend to see their shares outperform the market. In June, Campbell Soup Co. (NYSE: CPB) said it would buy back as much as $2 billion of its stock over three years, representing about 8% of its 451 million shares outstanding. The day the buyback was announced, the food maker's shares gained 2%.

Buyback programs are announced in local papers and in financial publications such as The Wall Street Journal and Barron's.

LAST CALL

We all wish that we had a direct channel into what's going on with the stocks we own or wish to buy. And, while direct signals from the bosses might be slow in coming or hard to spot, remember that investors in the know have not one but four ways to get a message sent from the boardroom. With that, who needs an intercom?