Safran's (EPA:SAF) investors will be pleased with their decent 46% return over the last five years

By
Simply Wall St
Published
April 13, 2022
ENXTPA:SAF
Source: Shutterstock

Stock pickers are generally looking for stocks that will outperform the broader market. And in our experience, buying the right stocks can give your wealth a significant boost. To wit, the Safran share price has climbed 40% in five years, easily topping the market return of 31% (ignoring dividends).

Let's take a look at the underlying fundamentals over the longer term, and see if they've been consistent with shareholders returns.

View our latest analysis for Safran

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).

During five years of share price growth, Safran actually saw its EPS drop 53% per year.

Essentially, it doesn't seem likely that investors are focused on EPS. 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 modest 0.5% dividend yield is unlikely to be propping up the share price. We are not particularly impressed by the annual compound revenue growth of 0.1% over five years. So why is the share price up? It's not immediately obvious to us, but a closer look at the company's progress over time might yield answers.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

earnings-and-revenue-growth
ENXTPA:SAF Earnings and Revenue Growth April 13th 2022

Safran 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 Safran in this interactive graph of future profit estimates.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Safran, it has a TSR of 46% for the last 5 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

While the broader market gained around 6.2% in the last year, Safran shareholders lost 13% (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. Longer term investors wouldn't be so upset, since they would have made 8%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. It's always interesting to track share price performance over the longer term. But to understand Safran better, we need to consider many other factors. To that end, you should be aware of the 2 warning signs we've spotted with Safran .

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 FR exchanges.

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