Investing in GlaxoSmithKline Pharmaceuticals (NSE:GLAXO) a year ago would have delivered you a 56% gain

It's always best to build a diverse portfolio of shares, since any stock business could lag the broader market. Of course, the aim of the game is to pick stocks that do better than an index fund. GlaxoSmithKline Pharmaceuticals Limited (NSE:GLAXO) has done well over the last year, with the stock price up 52% beating the market return of 47% (not including dividends). And shareholders have also done well over the long term, with an increase of 40% in the last three years.

So let's investigate and see if the longer term performance of the company has been in line with the underlying business' progress.

See our latest analysis for GlaxoSmithKline Pharmaceuticals

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. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

During the last year GlaxoSmithKline Pharmaceuticals grew its earnings per share (EPS) by 26%. This EPS growth is significantly lower than the 52% increase in the share price. So it's fair to assume the market has a higher opinion of the business than it a year ago. This favorable sentiment is reflected in its (fairly optimistic) P/E ratio of 62.89.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

We know that GlaxoSmithKline Pharmaceuticals has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.

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. As it happens, GlaxoSmithKline Pharmaceuticals' TSR for the last 1 year was 56%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

It's nice to see that GlaxoSmithKline Pharmaceuticals shareholders have received a total shareholder return of 56% over the last year. And that does include the dividend. That's better than the annualised return of 12% over half a decade, implying that the company is doing better recently. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. It's always interesting to track share price performance over the longer term. But to understand GlaxoSmithKline Pharmaceuticals better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with GlaxoSmithKline Pharmaceuticals , and understanding them should be part of your investment process.

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 Indian 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.