Should IG Group Holdings (LON:IGG) Be Disappointed With Their 35% Profit?

By buying an index fund, investors can approximate the average market return. But if you pick the right individual stocks, you could make more than that. For example, IG Group Holdings plc (LON:IGG) shareholders have seen the share price rise 35% over three years, well in excess of the market return (3.6%, 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 .

View our latest analysis for IG Group Holdings

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 the three years of share price growth, IG Group Holdings actually saw its earnings per share (EPS) drop 4.6% per year.

Companies are not always focussed on EPS growth in the short term, and looking at how the share price has reacted, we don’t think EPS is the most important metric for IG Group Holdings at the moment. So other metrics may hold the key to understanding what is influencing investors.

We note that the dividend is higher than it was preciously, so that may have assisted the share price. Sometimes yield-chasing investors will flock to a company if they think the dividend can grow over time.

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

LSE:IGG Income Statement, February 21st 2020
LSE:IGG Income Statement, February 21st 2020

We like that insiders have been buying shares in the last twelve months. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. You can see what analysts are predicting for IG Group Holdings 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. 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. We note that for IG Group Holdings the TSR over the last 3 years was 62%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

It’s good to see that IG Group Holdings has rewarded shareholders with a total shareholder return of 21% in the last twelve months. Of course, that includes the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 4.4% per year), it would seem that the stock’s performance has improved in recent times. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. 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. To that end, you should be aware of the 1 warning sign we’ve spotted with IG Group Holdings .

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.

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

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.