Investors in Incitec Pivot (ASX:IPL) have seen respectable returns of 51% over the past three years

By buying an index fund, investors can approximate the average market return. But many of us dare to dream of bigger returns, and build a portfolio ourselves. For example, Incitec Pivot Limited (ASX:IPL) shareholders have seen the share price rise 16% over three years, well in excess of the market return (5.9%, not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 10%, including dividends.

Now it's worth having a look at the company's fundamentals too, because that will help us determine if the long term shareholder return has matched the performance of the underlying business.

View our latest analysis for Incitec Pivot

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. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

Over the last three years, Incitec Pivot failed to grow earnings per share, which fell 7.5% (annualized). This was, in part, due to extraordinary items impacting earning in the last twelve months.

So we doubt that the market is looking to EPS for its main judge of the company's value. Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.

Interestingly, the dividend has increased over time; so that may have given the share price a boost. Sometimes yield-chasing investors will flock to a company if they think the dividend can grow over time. On top of that, revenue grew at a rate of 10% per year, and it's likely investors interpret that as pointing to a brighter future.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

Incitec Pivot is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. If you are thinking of buying or selling Incitec Pivot stock, you should check out this free report showing analyst consensus estimates for future profits.

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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Incitec Pivot, it has a TSR of 51% for the last 3 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

Incitec Pivot provided a TSR of 10% over the last twelve months. Unfortunately this falls short of the market return. On the bright side, that's still a gain, and it's actually better than the average return of 2% over half a decade It is possible that returns will improve along with the business fundamentals. It's always interesting to track share price performance over the longer term. But to understand Incitec Pivot better, we need to consider many other factors. For instance, we've identified 1 warning sign for Incitec Pivot that you should be aware of.

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 Australian exchanges.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com