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Investors can buy low cost index fund if they want to receive the average market return. But across the board there are plenty of stocks that underperform the market. That’s what has happened with the NZX Limited (NZSE:NZX) share price. It’s up 14% over three years, but that is below the market return. In the last year the stock price gained, albeit only 3.6%.
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 flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
Over the last three years, NZX failed to grow earnings per share, which fell 18% (annualized). The strong decline in earnings per share suggests the market isn’t using EPS to judge the company. So we’ll need to take a look at some different metrics to try to understand why the share price remains solid.
We note that the dividend is higher than it was preciously, so that may have assisted the share price. It could be that the company is reaching maturity and dividend investors are buying for the yield.
You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.
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 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. In the case of NZX, it has a TSR of 41% for the last 3 years. That exceeds its share price return that we previously mentioned. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
NZX shareholders are up 13% for the year (even including dividends). Unfortunately this falls short of the market return. The silver lining is that the gain was actually better than the average annual return of 4.2% per year over five year. It is possible that returns will improve along with the business fundamentals. Keeping this in mind, a solid next step might be to take a look at NZX’s dividend track record. This free interactive graph is a great place to start.
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 NZ 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.