The main point of investing for the long term is to make money. Better yet, you’d like to see the share price move up more than the market average. But Packaging Corporation of America (NYSE:PKG) has fallen short of that second goal, with a share price rise of 34% over five years, which is below the market return. Looking at the last year alone, the stock is up 19%.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One way to examine how market sentiment has changed over time is to look at the interaction between a company’s share price and its earnings per share (EPS).
During five years of share price growth, Packaging Corporation of America achieved compound earnings per share (EPS) growth of 8.7% per year. The EPS growth is more impressive than the yearly share price gain of 6.0% over the same period. Therefore, it seems the market has become relatively pessimistic about the company.
The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).
This free interactive report on Packaging Corporation of America’s earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of Packaging Corporation of America, it has a TSR of 55% for the last 5 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!
A Different Perspective
Packaging Corporation of America provided a TSR of 22% over the last twelve months. But that was short of the market average. The silver lining is that the gain was actually better than the average annual return of 9.1% per year over five year. This suggests the company might be improving over time. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. For example, we’ve discovered 2 warning signs for Packaging Corporation of America (1 is a bit concerning!) that you should be aware of before investing here.
If you would prefer to check out another company — one with potentially superior financials — then do not miss this free list of companies that have proven they can grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US 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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