Otter Tail's (NASDAQ:OTTR) earnings growth rate lags the 17% CAGR delivered to shareholders

When we invest, we're generally looking for stocks that outperform the market average. And the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, long term Otter Tail Corporation (NASDAQ:OTTR) shareholders have enjoyed a 96% share price rise over the last half decade, well in excess of the market return of around 80% (not including dividends).

While this past week has detracted from the company's five-year return, let's look at the recent trends of the underlying business and see if the gains have been in alignment.

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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.

Over half a decade, Otter Tail managed to grow its earnings per share at 27% a year. This EPS growth is higher than the 14% average annual increase in the share price. So one could conclude that the broader market has become more cautious towards the stock. The reasonably low P/E ratio of 10.80 also suggests market apprehension.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

It might be well worthwhile taking a look at our free report on Otter Tail's earnings, revenue and cash flow.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Otter Tail's TSR for the last 5 years was 124%, 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

Otter Tail shareholders are down 17% for the year (even including dividends), but the market itself is up 12%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. On the bright side, long term shareholders have made money, with a gain of 17% per year over half a decade. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Otter Tail (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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.