In order to justify the effort of selecting individual stocks, it’s worth striving to beat the returns from a market index fund. But every investor is virtually certain to have both over-performing and under-performing stocks. So we wouldn’t blame long term China Yuchai International Limited (NYSE:CYD) shareholders for doubting their decision to hold, with the stock down 34% over a half decade. And we doubt long term believers are the only worried holders, since the stock price has declined 26% over the last twelve months. Unhappily, the share price slid 3.2% in the last week.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
During the five years over which the share price declined, China Yuchai International’s earnings per share (EPS) dropped by 3.0% each year. This reduction in EPS is less than the 8.1% annual reduction in the share price. So it seems the market was too confident about the business, in the past. The less favorable sentiment is reflected in its current P/E ratio of 5.87.
It is of course excellent to see how China Yuchai International has grown profits over the years, but the future is more important for shareholders. If you are thinking of buying or selling China Yuchai International stock, you should check out this FREE detailed report on its balance sheet.
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. As it happens, China Yuchai International’s TSR for the last 5 years was -7.5%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
While the broader market gained around 0.5% in the last year, China Yuchai International shareholders lost 22% (even including dividends). Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Regrettably, last year’s performance caps off a bad run, with the shareholders facing a total loss of 1.5% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. Keeping this in mind, a solid next step might be to take a look at China Yuchai International’s dividend track record. This free interactive graph is a great place to start.
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 US exchanges.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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. Thank you for reading.