Autoliv (NYSE:ALV) stock performs better than its underlying earnings growth over last five years

When you buy and hold a stock for the long term, you definitely want it to provide a positive return. Furthermore, you'd generally like to see the share price rise faster than the market. But Autoliv, Inc. (NYSE:ALV) has fallen short of that second goal, with a share price rise of 22% over five years, which is below the market return. The last year has been disappointing, with the stock price down 5.0% in that time.

On the back of a solid 7-day performance, let's check what role the company's fundamentals have played in driving long term shareholder returns.

View our latest analysis for Autoliv

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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 five years of share price growth, Autoliv achieved compound earnings per share (EPS) growth of 27% per year. The EPS growth is more impressive than the yearly share price gain of 4% over the same period. Therefore, it seems the market has become relatively pessimistic about the company. This cautious sentiment is reflected in its (fairly low) P/E ratio of 11.98.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

It's probably worth noting that the CEO is paid less than the median at similar sized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Autoliv's TSR for the last 5 years was 36%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

Autoliv shareholders are down 2.6% for the year (even including dividends), but the market itself is up 27%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn't be so upset, since they would have made 6%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. 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. For instance, we've identified 2 warning signs for Autoliv that you should be aware of.

But note: Autoliv may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

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

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.