Does Meridian Energy's (NZSE:MEL) Share Price Gain of 63% Match Its Business Performance?

By
Simply Wall St
Published
May 27, 2019
NZSE:MEL

By buying an index fund, investors can approximate the average market return. But if you pick the right individual stocks, you could make more than that. For example, the Meridian Energy Limited (NZSE:MEL) share price is up 63% in the last three years, clearly besting than the market return of around 25% (not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 50%, including dividends.

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View our latest analysis for Meridian Energy

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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, Meridian Energy achieved compound earnings per share growth of 1.4% per year. This EPS growth is lower than the 18% average annual increase in the share price. So it's fair to assume the market has a higher opinion of the business than it did three years ago. It's not unusual to see the market 're-rate' a stock, after a few years of growth. This optimism is also reflected in the fairly generous P/E ratio of 45.48.

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

NZSE:MEL Past and Future Earnings, May 27th 2019
NZSE:MEL Past and Future Earnings, May 27th 2019

We know that Meridian Energy has improved its bottom line lately, but is it going to grow revenue? If you're interested, you could check this free report showing consensus revenue forecasts.

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. We note that for Meridian Energy the TSR over the last 3 years was 95%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

Pleasingly, Meridian Energy's total shareholder return last year was 50%. That includes the value of the dividend. So this year's TSR was actually better than the three-year TSR (annualized) of 25%. Given the track record of solid returns over varying time frames, it might be worth putting Meridian Energy on your watchlist. Importantly, we haven't analysed Meridian Energy's dividend history. This free visual report on its dividends is a must-read if you're thinking of buying.

Of course Meridian Energy 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 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 editorial-team@simplywallst.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.

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