Buying a low-cost index fund will get you the average market return. But in any diversified portfolio of stocks, you’ll see some that fall short of the average. That’s what has happened with the Grainger plc (LON:GRI) share price. It’s up 13% over three years, but that is below the market return. Disappointingly, the share price is down 10% in the last year.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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.
Grainger was able to grow its EPS at 25% per year over three years, sending the share price higher. This EPS growth is higher than the 4.2% average annual increase in the share price. So one could reasonably conclude that the market has cooled on the stock. We’d venture the lowish P/E ratio of 11.65 also reflects the negative sentiment around the stock.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
It’s probably worth noting that the CEO is paid less than the median at similar sized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. Dive deeper into the earnings by checking this interactive graph of Grainger’s earnings, revenue and cash flow.
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. We note that for Grainger the TSR over the last 3 years was 33%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
It’s good to see that Grainger has rewarded shareholders with a total shareholder return of 1.1% in the last twelve months. Of course, that includes the dividend. However, that falls short of the 3.9% TSR per annum it has made for shareholders, each year, over five years. Potential buyers might understandably feel they’ve missed the opportunity, but it’s always possible business is still firing on all cylinders. Before spending more time on Grainger it might be wise to click here to see if insiders have been buying or selling shares.
If you would prefer to check out another company — one with potentially superior financials — then do not miss this free list of companies that have proven they can grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB exchanges.
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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.