Norsk Hydro (OB:NHY) stock performs better than its underlying earnings growth over last three years

By
Simply Wall St
Published
May 22, 2022
OB:NHY
Source: Shutterstock

It might be of some concern to shareholders to see the Norsk Hydro ASA (OB:NHY) share price down 18% in the last month. But that doesn't change the fact that the returns over the last three years have been very strong. In three years the stock price has launched 126% higher: a great result. So the recent fall in the share price should be viewed in that context. The fundamental business performance will ultimately dictate whether the top is in, or if this is a stellar buying opportunity.

Since it's been a strong week for Norsk Hydro shareholders, let's have a look at trend of the longer term fundamentals.

See our latest analysis for Norsk Hydro

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.

During three years of share price growth, Norsk Hydro achieved compound earnings per share growth of 95% per year. The average annual share price increase of 31% is actually lower than the EPS growth. So it seems investors have become more cautious about the company, over time. We'd venture the lowish P/E ratio of 9.35 also reflects the negative sentiment around the stock.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

earnings-per-share-growth
OB:NHY Earnings Per Share Growth May 22nd 2022

We know that Norsk Hydro has improved its bottom line over the last three years, but what does the future have in store? This free interactive report on Norsk Hydro'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 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Norsk Hydro's TSR for the last 3 years was 160%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

It's nice to see that Norsk Hydro shareholders have received a total shareholder return of 53% over the last year. And that does include the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 14% per year), it would seem that the stock's performance has improved in recent times. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example - Norsk Hydro has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

Of course Norsk Hydro may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on NO exchanges.

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