A CEO has just sold £1.4m worth of shares in a FTSE 250 company!

Directors’ Relationships FTSE250 shares can provide additional insight into what management thinks of the business. When insiders start buying, it’s usually a strong indicator that they’re confident in long-term performance. But when they start selling, it can suggest something’s going wrong.

So I was intrigued to see it Babcock International (LSE:BAB) CFO David Mellors sold around £1.4m worth of shares in early September. And he wasn’t alone. Just a week earlier, CEO David Lockwood sold almost £2.1m worth of shares!

Needless to say, the sight of two of the company’s most important executives selling huge blocks of shares is unsettling. Do they know something we don’t? And should investors follow their example?

What’s happening at Babcock?

2024 has been a relatively good year for Babcock shareholders, with the defense contractor seeing its share price rise by more than 15% since January, even after a slight dip in recent results.

Like-for-like revenues are growing in double digits. And thanks to significant margin expansion, underlying operating profits have increased from £177.9m to £237.8m between March 2023 and March 2024. Combine this with a contracted order book of £10.3bn, and the company is not short of customer orders, nor is this likely to change given the rise in geopolitical conflicts around the world.

But profits have not been perfect. The problems with the MoD frigate contract continue. A sudden increase in the cost of raw materials, labour and energy, as well as other overheads, has caused the contract to go way over budget. And because prices are fixed, the group made a loss of £100m on the deal in fiscal 2023. Now another £90m has simply evaporated.

Despite this costly setback, Babcock’s financial situation continues to trend in the right direction. A surge in free cash flow has allowed management to continue to combat the company’s pension deficit, and net debt has fallen dramatically over the past four years.

Of course, this is all rather positive. So why are CEOs and CFOs selling millions of pounds worth of shares?

Director’s Profession Control

Judging by the regulatory filings, Mellors and Lockwood don’t appear to be backing down. Both executives recently received their annual pay packages, which included awards of 586,808 and 838,292 shares respectively. And about half of those awards were sold to be converted into cash.

Overall, both directors actually increased their net stake in Babcock, further aligning their interests with those of shareholders, which is an encouraging sign.

So should investors consider selling? If I were a shareholder in this FTSE 250 company, these director trades wouldn’t be enough evidence for me to start reducing my position. Instead, I’d be looking for other warning signs that could indicate operational problems. For example, if balance sheet deleveraging, the pension deficit or order fulfillment suddenly started to go in the wrong direction.