Abu Dhabi Aviation (ADX:ADAVIATION) stock performs better than its underlying earnings growth over last five years

Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. Buying under-rated businesses is one path to excess returns. To wit, the Abu Dhabi Aviation share price has climbed 91% in five years, easily topping the market return of 26% (ignoring dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 30% in the last year , including dividends .

On the back of a solid 7-day performance, let's check what role the company's fundamentals have played in driving long term shareholder returns.

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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.

Over half a decade, Abu Dhabi Aviation managed to grow its earnings per share at 4.6% a year. This EPS growth is lower than the 14% average annual increase in the share price. This suggests that market participants hold the company in higher regard, these days. And that's hardly shocking given the track record of growth.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

We know that Abu Dhabi Aviation has improved its bottom line lately, but is it going to grow revenue? If you're interested, you could check this free report showing consensus revenue forecasts.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Abu Dhabi Aviation's TSR for the last 5 years was 148%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

Abu Dhabi Aviation provided a TSR of 30% over the last twelve months. Unfortunately this falls short of the market return. The silver lining is that the gain was actually better than the average annual return of 20% per year over five year. It is possible that returns will improve along with the business fundamentals. Before deciding if you like the current share price, check how Abu Dhabi Aviation scores on these 3 valuation metrics.

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Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AE exchanges.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.