Investors in Meridian Energy (NZSE:MEL) have made a stellar return of 145% over the past five years

By
Simply Wall St
Published
September 27, 2021
NZSE:MEL
Source: Shutterstock

Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. Buying under-rated businesses is one path to excess returns. To wit, the Meridian Energy share price has climbed 94% in five years, easily topping the market return of 36% (ignoring dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 7.8% in the last year , including dividends .

With that in mind, it's worth seeing if the company's underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.

See our latest analysis for Meridian Energy

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.

During five years of share price growth, Meridian Energy achieved compound earnings per share (EPS) growth of 18% per year. The EPS growth is more impressive than the yearly share price gain of 14% over the same period. So it seems the market isn't so enthusiastic about the stock these days.

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

earnings-per-share-growth
NZSE:MEL Earnings Per Share Growth September 27th 2021

We know that Meridian Energy has improved its bottom line lately, but is it going to grow revenue? Check if analysts think Meridian Energy will grow revenue in the future.

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 Meridian Energy the TSR over the last 5 years was 145%, 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

Meridian Energy shareholders are up 7.8% for the year (even including dividends). But that was short of the market average. On the bright side, the longer term returns (running at about 20% a year, over half a decade) look better. It's quite possible the business continues to execute with prowess, even as the share price gains are slowing. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Case in point: We've spotted 2 warning signs for Meridian Energy you should be aware of.

We will like Meridian Energy better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on NZ exchanges.

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