The main point of investing for the long term is to make money. Better yet, you’d like to see the share price move up more than the market average. But Cipla Limited (NSE:CIPLA) has fallen short of that second goal, with a share price rise of 37% over five years, which is below the market return. Unfortunately the share price is down 4.8% in the last year.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One way to examine how market sentiment has changed over time is to look at the interaction between a company’s share price and its earnings per share (EPS).
During five years of share price growth, Cipla actually saw its EPS drop 1.0% per year. By glancing at these numbers, we’d posit that the decline in earnings per share is not representative of how the business has changed over the years. Since the change in EPS doesn’t seem to correlate with the change in share price, it’s worth taking a look at other metrics.
The modest 0.6% dividend yield is unlikely to be propping up the share price. In contrast revenue growth of 9.2% per year is probably viewed as evidence that Cipla is growing, a real positive. In that case, the company may be sacrificing current earnings per share to drive growth.
The graphic below shows how revenue and earnings have changed as management guided the business forward. If you want to see cashflow, you can click on the chart.
Cipla is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. If you are thinking of buying or selling Cipla stock, you should check out this free report showing analyst consensus estimates for future profits.
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 incorporates the value of any discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Cipla the TSR over the last 5 years was 40%, which is better than the share price return mentioned above. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Investors in Cipla had a tough year, with a total loss of 4.3% (including dividends), against a market gain of about 2.2%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. On the bright side, long term shareholders have made money, with a gain of 7.0% per year over half a decade. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. Before spending more time on Cipla it might be wise to click here to see if insiders have been buying or selling shares.
But note: Cipla may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on IN 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.