When we invest, we’re generally looking for stocks that outperform the market average. Buying under-rated businesses is one path to excess returns. For example, the Intact Financial Corporation (TSE:IFC) share price is up 64% in the last 5 years, clearly besting the market return of around 10% (ignoring dividends). However, more recent returns haven’t been as impressive as that, with the stock returning just 41% in the last year , including dividends .
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it’s a weighing machine. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.
During five years of share price growth, Intact Financial actually saw its EPS drop 2.6% per year.
So it’s hard to argue that the earnings per share are the best metric to judge the company, as it may not be optimized for profits at this point. Therefore, it’s worth taking a look at other metrics to try to understand the share price movements.
In contrast revenue growth of 8.0% per year is probably viewed as evidence that Intact Financial is growing, a real positive. In that case, the company may be sacrificing current earnings per share to drive growth.
You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).
Intact Financial is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. Given we have quite a good number of analyst forecasts, it might be well worth checking out this free chart depicting consensus estimates.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Intact Financial the TSR over the last 5 years was 87%, which is better than the share price return mentioned above. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
We’re pleased to report that Intact Financial shareholders have received a total shareholder return of 41% over one year. And that does include the dividend. That’s better than the annualised return of 13% over half a decade, implying that the company is doing better recently. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. Most investors take the time to check the data on insider transactions. You can click here to see if insiders have been buying or selling.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on CA exchanges.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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