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By buying an index fund, you can roughly match the market return with ease. But if you pick the right individual stocks, you could make more than that. Just take a look at Koninklijke Philips N.V. (AMS:PHIA), which is up 50%, over three years, soundly beating the market return of 22% (not including dividends). However, more recent returns haven’t been as impressive as that, with the stock returning just 0.9% in the last year, including dividends.
To quote Buffett, ‘Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace…’ 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.
Koninklijke Philips was able to grow its EPS at 56% per year over three years, sending the share price higher. The average annual share price increase of 14% is actually lower than the EPS growth. Therefore, it seems the market has moderated its expectations for growth, somewhat.
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 Koninklijke Philips has grown profits over the years, but the future is more important for shareholders. This free interactive report on Koninklijke Philips’s balance sheet strength is a great place to start, if you want to investigate the stock further.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or 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 Koninklijke Philips the TSR over the last 3 years was 61%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
It’s good to see that Koninklijke Philips has rewarded shareholders with a total shareholder return of 0.9% in the last twelve months. And that does include the dividend. Having said that, the five-year TSR of 11% a year, is even better. The pessimistic view would be that be that the stock has its best days behind it, but on the other hand the price might simply be moderating while the business itself continues to execute. Before deciding if you like the current share price, check how Koninklijke Philips scores on these 3 valuation metrics.
But note: Koninklijke Philips 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 NL 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 firstname.lastname@example.org. 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.