By buying an index fund, investors can approximate the average market return. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. For example, St. Modwen Properties PLC (LON:SMP) shareholders have seen the share price rise 38% over three years, well in excess of the market return (16%, not including dividends). However, more recent returns haven’t been as impressive as that, with the stock returning just 2.6% in the last year, including dividends.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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, St. Modwen Properties actually saw its earnings per share (EPS) drop 35% per year. This means it’s unlikely the market is judging the company based on earnings growth. Therefore, we think it’s worth considering other metrics as well.
The modest 1.8% dividend yield is unlikely to be propping up the share price. It may well be that St. Modwen Properties revenue growth rate of 13% over three years has convinced shareholders to believe in a brighter future. In that case, the company may be sacrificing current earnings per share to drive growth, and maybe shareholder’s faith in better days ahead will be rewarded.
Depicted in the graphic below, you’ll see revenue and earnings over time. If you want more detail, you can click on the chart itself.
It’s probably worth noting we’ve seen significant insider buying in the last quarter, which we consider a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. You can see what analysts are predicting for St. Modwen Properties 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. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for St. Modwen Properties the TSR over the last 3 years was 45%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
St. Modwen Properties shareholders gained a total return of 2.6% during the year. But that return falls short of the market. If we look back over five years, the returns are even better, coming in at 3.4% per year for five years. It’s quite possible the business continues to execute with prowess, even as the share price gains are slowing. It is all well and good that insiders have been buying shares, but we suggest you check here to see what price insiders were buying at.
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.
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.
If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.