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For many, the main point of investing is to generate higher returns than the overall market. But the main game is to find enough winners to more than offset the losers So we wouldn't blame long term AMP Limited (ASX:AMP) shareholders for doubting their decision to hold, with the stock down 37% over a half decade.
With that in mind, it's worth seeing if the company's underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.
Check out our latest analysis for AMP
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 way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
During the five years over which the share price declined, AMP's earnings per share (EPS) dropped by 5.4% each year. This reduction in EPS is less than the 9% annual reduction in the share price. This implies that the market was previously too optimistic about the stock. Of course, with a P/E ratio of 153.69, the market remains optimistic.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
We know that AMP has improved its bottom line lately, but is it going to grow revenue? Check if analysts think AMP will grow revenue in the future.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, AMP's TSR for the last 5 years was -29%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
AMP shareholders are up 11% for the year (even including dividends). Unfortunately this falls short of the market return. On the bright side, that's still a gain, and it is certainly better than the yearly loss of about 5% endured over half a decade. So this might be a sign the business has turned its fortunes around. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with AMP (at least 2 which can't be ignored) , and understanding them should be part of your investment process.