Earnings growth of 0.3% over 3 years hasn't been enough to translate into positive returns for Hong Kong Exchanges and Clearing (HKG:388) shareholders

Many investors define successful investing as beating the market average over the long term. But in any portfolio, there are likely to be some stocks that fall short of that benchmark. We regret to report that long term Hong Kong Exchanges and Clearing Limited (HKG:388) shareholders have had that experience, with the share price dropping 50% in three years, versus a market decline of about 28%. And more recent buyers are having a tough time too, with a drop of 29% in the last year. The falls have accelerated recently, with the share price down 14% in the last three months. We note that the company has reported results fairly recently; and the market is hardly delighted. You can check out the latest numbers in our company report.

After losing 5.2% this past week, it's worth investigating the company's fundamentals to see what we can infer from past performance.

View our latest analysis for Hong Kong Exchanges and Clearing

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 unfortunate three years of share price decline, Hong Kong Exchanges and Clearing actually saw its earnings per share (EPS) improve by 1.0% per year. This is quite a puzzle, and suggests there might be something temporarily buoying the share price. Or else the company was over-hyped in the past, and so its growth has disappointed.

It looks to us like the market was probably too optimistic around growth three years ago. Looking to other metrics might better explain the share price change.

The company has kept revenue pretty healthy over the last three years, so we doubt that explains the falling share price. We're not entirely sure why the share price is dropped, but it does seem likely investors have become less optimistic about the business.

You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).

Hong Kong Exchanges and Clearing 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 Hong Kong Exchanges and Clearing 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 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Hong Kong Exchanges and Clearing's TSR for the last 3 years was -46%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

We regret to report that Hong Kong Exchanges and Clearing shareholders are down 27% for the year (even including dividends). Unfortunately, that's worse than the broader market decline of 11%. However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there's a good opportunity. Longer term investors wouldn't be so upset, since they would have made 0.2%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. It's always interesting to track share price performance over the longer term. But to understand Hong Kong Exchanges and Clearing better, we need to consider many other factors. To that end, you should be aware of the 1 warning sign we've spotted with Hong Kong Exchanges and Clearing .

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

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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.