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The main point of investing for the long term is to make money. Furthermore, you’d generally like to see the share price rise faster than the market Unfortunately for shareholders, while the Target Corporation (NYSE:TGT) share price is up 19% in the last five years, that’s less than the market return. Zooming in, the stock is actually down 4.0% in the last year.
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, Target achieved compound earnings per share (EPS) growth of 3.8% per year. So the EPS growth rate is rather close to the annualized share price gain of 3.5% per year. Therefore one could conclude that sentiment towards the shares hasn’t morphed very much. Rather, the share price has approximately tracked EPS growth.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We know that Target has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Target, it has a TSR of 40% for the last 5 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
While the broader market gained around 3.1% in the last year, Target shareholders lost 0.7% (even including dividends). 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 7.0%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. If you would like to research Target in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.
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 US 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.