Direct Line Insurance Group (LON:DLG) stock falls 9.2% in past week as five-year earnings and shareholder returns continue downward trend

For many, the main point of investing is to generate higher returns than the overall market. But every investor is virtually certain to have both over-performing and under-performing stocks. So we wouldn't blame long term Direct Line Insurance Group plc (LON:DLG) shareholders for doubting their decision to hold, with the stock down 59% over a half decade. And we doubt long term believers are the only worried holders, since the stock price has declined 42% over the last twelve months. The falls have accelerated recently, with the share price down 25% in the last three months. This could be related to the recent financial results - you can catch up on the most recent data by reading our company report.

After losing 9.2% this past week, it's worth investigating the company's fundamentals to see what we can infer from past performance.

See our latest analysis for Direct Line Insurance Group

There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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).

Looking back five years, both Direct Line Insurance Group's share price and EPS declined; the latter at a rate of 8.2% per year. This reduction in EPS is less than the 16% annual reduction in the share price. This implies that the market was previously too optimistic about the stock. The low P/E ratio of 7.71 further reflects this reticence.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

This free interactive report on Direct Line Insurance Group's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Direct Line Insurance Group the TSR over the last 5 years was -37%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

While the broader market gained around 2.8% in the last year, Direct Line Insurance Group shareholders lost 36% (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. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 7% per year over five years. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Case in point: We've spotted 2 warning signs for Direct Line Insurance Group you should be aware of.

But note: Direct Line Insurance Group may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

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