Did The Underlying Business Drive Broadcom’s (NASDAQ:AVGO) Lovely 417% Share Price Gain?

For many, the main point of investing in the stock market is to achieve spectacular returns. While not every stock performs well, when investors win, they can win big. Don’t believe it? Then look at the Broadcom Inc. (NASDAQ:AVGO) share price. It’s 417% higher than it was five years ago. This just goes to show the value creation that some businesses can achieve. Also pleasing for shareholders was the 29% gain in the last three months. But this move may well have been assisted by the reasonably buoyant market (up 13% in 90 days).

View our latest analysis for Broadcom

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 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.

Over half a decade, Broadcom managed to grow its earnings per share at 47% a year. The EPS growth is more impressive than the yearly share price gain of 39% over the same period. Therefore, it seems the market has become relatively pessimistic about the company.

The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).

NasdaqGS:AVGO Past and Future Earnings, April 8th 2019
NasdaqGS:AVGO Past and Future Earnings, April 8th 2019

We’re pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. It’s always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Broadcom’s TSR for the last 5 years was 471%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

It’s good to see that Broadcom has rewarded shareholders with a total shareholder return of 34% in the last twelve months. That’s including the dividend. However, that falls short of the 42% TSR per annum it has made for shareholders, each year, over five years. Most investors take the time to check the data on insider transactions. You can click here to see if insiders have been buying or selling.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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 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.