Luk Fook Holdings (International)'s (HKG:590) five-year earnings growth trails the shareholder returns

Ideally, your overall portfolio should beat the market average. A talented investor can beat the market with a diversified portfolio, but even then, some stocks will under-perform. The Luk Fook Holdings (International) Limited (HKG:590) stock price is down 20% over five years, but the total shareholder return is 7.2% once you include the dividend. And that total return actually beats the market decline of 11%.

While the last five years has been tough for Luk Fook Holdings (International) shareholders, this past week has shown signs of promise. So let's look at the longer term fundamentals and see if they've been the driver of the negative returns.

View our latest analysis for Luk Fook Holdings (International)

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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.

While the share price declined over five years, Luk Fook Holdings (International) actually managed to increase EPS by an average of 0.7% per year. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Alternatively, growth expectations may have been unreasonable in the past.

Given that EPS has increased, but the share price has fallen, it's fair to say that market sentiment around the stock has become more negative. That said, if EPS continues to increase, it seems very likely the share price will get a boost, in the long term.

The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).

We consider it positive that insiders have made significant purchases in the last year. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..

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 or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Luk Fook Holdings (International), it has a TSR of 7.2% for the last 5 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

Luk Fook Holdings (International) shareholders are down 14% over twelve months (even including dividends), which isn't far from the market return of -15%. Longer term investors wouldn't be so upset, since they would have made 1.4%, each year, over five years. If the stock price has been impacted by changing sentiment, rather than deteriorating business conditions, it could spell 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. Take risks, for example - Luk Fook Holdings (International) has 1 warning sign we think you should be aware of.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.