Westpac Banking's (ASX:WBC) earnings growth rate lags the 17% CAGR delivered to shareholders

By buying an index fund, you can roughly match the market return with ease. But if you choose individual stocks with prowess, you can make superior returns. For example, the Westpac Banking Corporation (ASX:WBC) share price is up 36% in the last three years, clearly besting the market return of around 13% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 32% in the last year, including dividends.

While this past week has detracted from the company's three-year return, let's look at the recent trends of the underlying business and see if the gains have been in alignment.

See our latest analysis for Westpac Banking

While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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 three years of share price growth, Westpac Banking achieved compound earnings per share growth of 12% per year. We don't think it is entirely coincidental that the EPS growth is reasonably close to the 11% average annual increase in the share price. This suggests that sentiment and expectations have not changed drastically. Rather, the share price has approximately tracked EPS growth.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

It's probably worth noting we've seen significant insider buying in the last quarter, which we consider a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. This free interactive report on Westpac Banking's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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 Westpac Banking, it has a TSR of 62% for the last 3 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

It's nice to see that Westpac Banking shareholders have received a total shareholder return of 32% over the last year. That's including the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 11% per year), it would seem that the stock's performance has improved in recent times. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. It's always interesting to track share price performance over the longer term. But to understand Westpac Banking better, we need to consider many other factors. To that end, you should learn about the 2 warning signs we've spotted with Westpac Banking (including 1 which is a bit unpleasant) .

Westpac Banking is not the only stock that insiders are buying. For those who like to find lesser know companies this free list of growing companies with recent insider purchasing, could be just the ticket.

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