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The simplest way to benefit from a rising market is to buy an index fund. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. Investors in Guangzhou Rural Commercial Bank Co., Ltd. (HKG:1551) have tasted that bitter downside in the last year, as the share price dropped 16%. That’s well bellow the market return of -7.4%. Guangzhou Rural Commercial Bank hasn’t been listed for long, so although we’re wary of recent listings that perform poorly, it may still prove itself with time. The good news is that the stock is up 3.5% in the last week.
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 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 unfortunate twelve months during which the Guangzhou Rural Commercial Bank share price fell, it actually saw its earnings per share (EPS) improve by 8.7%. It’s quite possible that growth expectations may have been unreasonable in the past. It’s fair to say that the share price does not seem to be reflecting the EPS growth. So it’s easy to justify a look at some other metrics.
We don’t see any weakness in the Guangzhou Rural Commercial Bank’s dividend so the steady payout can’t really explain the share price drop. From what we can see, revenue is pretty flat, so that doesn’t really explain the share price drop. Unless, of course, the market was expecting a revenue uptick.
The chart below shows how revenue and earnings have changed with time, (if you click on the chart you can see the actual values).
It’s probably worth noting that the CEO is paid less than the median at similar sized companies. It’s always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. This free interactive report on Guangzhou Rural Commercial Bank’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. 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. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Guangzhou Rural Commercial Bank the TSR over the last year was -12%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
We doubt Guangzhou Rural Commercial Bank shareholders are happy with the loss of 12% over twelve months (even including dividends). That falls short of the market, which lost 7.4%. There’s no doubt that’s a disappointment, but the stock may well have fared better in a stronger market. With the stock down 2.2% over the last three months, the market doesn’t seem to believe that the company has solved all its problems. Basically, most investors should be wary of buying into a poor-performing stock, unless the business itself has clearly improved. Before forming an opinion on Guangzhou Rural Commercial Bank you might want to consider the cold hard cash it pays as a dividend. This free chart tracks its dividend over time.
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 HK 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 firstname.lastname@example.org. 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.