By buying an index fund, investors can approximate the average market return. But if you choose individual stocks with prowess, you can make superior returns. For example, Deutsche Lufthansa AG (ETR:LHA) shareholders have seen the share price rise 39% over three years, well in excess of the market return (15%, not including dividends).
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. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
Over the last three years, Deutsche Lufthansa failed to grow earnings per share, which fell 9.1% (annualized).
This means it's unlikely the market is judging the company based on earnings growth. Therefore, we think it's worth considering other metrics as well.
Interestingly, the dividend has increased over time; so that may have given the share price a boost. It could be that the company is reaching maturity and dividend investors are buying for the yield. The revenue growth of about 4.9% per year might also encourage buyers.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
Deutsche Lufthansa is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. Given we have quite a good number of analyst forecasts, it might be well worth checking out this free chart depicting consensus estimates.
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. We note that for Deutsche Lufthansa the TSR over the last 3 years was 54%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Investors in Deutsche Lufthansa had a tough year, with a total loss of 16% (including dividends) , against a market gain of about 14%. 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. Longer term investors wouldn't be so upset, since they would have made 6.5%, 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. Before forming an opinion on Deutsche Lufthansa you might want to consider the cold hard cash it pays as a dividend. This free chart tracks its dividend over time.
But note: Deutsche Lufthansa 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 DE exchanges.
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.
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. Thank you for reading.