By buying an index fund, investors can approximate the average market return. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. For example, the Saudia Dairy & Foodstuff Company (TADAWUL:2270) share price is up 69% in the last three years, clearly besting the market return of around 26% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 17% in the last year , including dividends .
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 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 the three years of share price growth, Saudia Dairy & Foodstuff actually saw its earnings per share (EPS) drop 0.1% per year.
Companies are not always focussed on EPS growth in the short term, and looking at how the share price has reacted, we don't think EPS is the most important metric for Saudia Dairy & Foodstuff at the moment. So other metrics may hold the key to understanding what is influencing investors.
It could be that the revenue growth of 9.7% per year is viewed as evidence that Saudia Dairy & Foodstuff is growing. If the company is being managed for the long term good, today's shareholders might be right to hold on.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
We know that Saudia Dairy & Foodstuff has improved its bottom line lately, but what does the future have in store? So it makes a lot of sense to check out what analysts think Saudia Dairy & Foodstuff will earn in the future (free profit forecasts).
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. As it happens, Saudia Dairy & Foodstuff's TSR for the last 3 years was 89%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
Saudia Dairy & Foodstuff provided a TSR of 17% over the last twelve months. Unfortunately this falls short of the market return. The silver lining is that the gain was actually better than the average annual return of 8% per year over five year. This could indicate that the company is winning over new investors, as it pursues its strategy. It's always interesting to track share price performance over the longer term. But to understand Saudia Dairy & Foodstuff better, we need to consider many other factors. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Saudia Dairy & Foodstuff you should know about.
Of course Saudia Dairy & Foodstuff 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 SA exchanges.
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