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, the Smurfit Kappa Group Plc (ISE:SK3) share price is up 76% in the last three years, clearly besting the market return of around 21% (not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 12% , including dividends .
In light of the stock dropping 8.9% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive three-year return.
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.
Smurfit Kappa Group became profitable within the last three years. So we would expect a higher share price over the period.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
It is of course excellent to see how Smurfit Kappa Group has grown profits over the years, but the future is more important for shareholders. This free interactive report on Smurfit Kappa Group's balance sheet strength 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 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Smurfit Kappa Group's TSR for the last 3 years was 94%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
Smurfit Kappa Group's TSR for the year was broadly in line with the market average, at 12%. It has to be noted that the recent return falls short of the 15% shareholders have gained each year, over half a decade. More recently, the share price growth has slowed. But it has to be said the overall picture is one of good long term and short term performance. Arguably that makes Smurfit Kappa Group a stock worth watching. 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. Case in point: We've spotted 2 warning signs for Smurfit Kappa Group you should be aware of.
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 IE exchanges.
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.