Sappi's (JSE:SAP) five-year total shareholder returns outpace the underlying earnings growth

While Sappi Limited (JSE:SAP) shareholders are probably generally happy, the stock hasn't had particularly good run recently, with the share price falling 27% in the last quarter. But the silver lining is the stock is up over five years. Unfortunately its return of 86% is below the market return of 122%. Unfortunately not all shareholders will have held it for five years, so spare a thought for those caught in the 36% decline over the last three years: that's a long time to wait for profits.

In light of the stock dropping 11% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive five-year return.

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 last half decade, Sappi became profitable. That's generally thought to be a genuine positive, so investors may expect to see an increasing share price.

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

We know that Sappi has improved its bottom line lately, but is it going to grow revenue? If you're interested, you could check this free report showing consensus revenue forecasts.

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, Sappi's TSR for the last 5 years was 120%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

While the broader market gained around 24% in the last year, Sappi shareholders lost 24% (even including dividends). However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. 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. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Case in point: We've spotted 3 warning signs for Sappi you should be aware of, and 1 of them shouldn't be ignored.

We will like Sappi better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) with considerable, recent, insider buying.

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