Pulling back 4.4% this week, Fortum Oyj's HEL:FORTUM) three-year decline in earnings may be coming into investors focus

Explore Fortum Oyj's Fair Values from the Community and select yours

One simple way to benefit from the stock market is to buy an index fund. But many of us dare to dream of bigger returns, and build a portfolio ourselves. Just take a look at Fortum Oyj (HEL:FORTUM), which is up 39%, over three years, soundly beating the market decline of 6.6% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 21% in the last year, including dividends.

While the stock has fallen 4.4% this week, it's worth focusing on the longer term and seeing if the stocks historical returns have been driven by the underlying fundamentals.

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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, Fortum Oyj failed to grow earnings per share, which fell 47% (annualized).

Thus, it seems unlikely that the market is focussed on EPS growth at the moment. 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.

The dividend is no better now than it was three years ago, so that is unlikely to have driven the share price higher. It could be that the revenue decline of 13% per year is viewed as evidence that Fortum Oyj is shrinking. And to be fair, we don't see how EPS can grow sustainably without a boost to revenue.

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

Fortum Oyj is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. You can see what analysts are predicting for Fortum Oyj in this interactive graph of future profit estimates.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. We note that for Fortum Oyj the TSR over the last 3 years was 80%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

It's good to see that Fortum Oyj has rewarded shareholders with a total shareholder return of 21% in the last twelve months. That's including the dividend. That's better than the annualised return of 6% over half a decade, implying that the company is doing better recently. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Even so, be aware that Fortum Oyj is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.

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