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It might be of some concern to shareholders to see the Broadcom Inc. (NASDAQ:AVGO) share price down 15% in the last month. Looking further back, the stock has generated good profits over five years. Its return of 93% has certainly bested the market return!
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.
View our latest analysis for Broadcom
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 imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.
Over half a decade, Broadcom managed to grow its earnings per share at 75% a year. The EPS growth is more impressive than the yearly share price gain of 14% over the same period. Therefore, it seems the market has become relatively pessimistic about the company.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. This free interactive report on Broadcom's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Broadcom's TSR for the last 5 years was 130%, 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
While it's certainly disappointing to see that Broadcom shares lost 4.4% throughout the year, that wasn't as bad as the market loss of 22%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 18% for each year. It could be that the business is just facing some short term problems, but shareholders should keep a close eye on the fundamentals. 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 1 warning sign with Broadcom , and understanding them should be part of your investment process.