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Buying shares in the best businesses can build meaningful wealth for you and your family. And highest quality companies can see their share prices grow by huge amounts. For example, the Carrier Global Corporation (NYSE:CARR) share price is up a whopping 355% in the last half decade, a handsome return for long term holders. And this is just one example of the epic gains achieved by some long term investors.
Let's take a look at the underlying fundamentals over the longer term, and see if they've been consistent with shareholders returns.
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.
During five years of share price growth, Carrier Global actually saw its EPS drop 12% per year.
This means it's unlikely the market is judging the company based on earnings growth. Because earnings per share don't seem to match up with the share price, we'll take a look at other metrics instead.
The modest 1.4% dividend yield is unlikely to be propping up the share price. On the other hand, Carrier Global's revenue is growing nicely, at a compound rate of 5.3% over the last five years. In that case, the company may be sacrificing current earnings per share to drive growth.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
Carrier Global is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. You can see what analysts are predicting for Carrier Global in this interactive graph of future profit estimates.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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 or spin-off. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Carrier Global the TSR over the last 5 years was 385%, 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
We're pleased to report that Carrier Global shareholders have received a total shareholder return of 16% over one year. And that does include the dividend. Having said that, the five-year TSR of 37% a year, is even better. Potential buyers might understandably feel they've missed the opportunity, but it's always possible business is still firing on all cylinders. 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. For instance, we've identified 2 warning signs for Carrier Global (1 is a bit concerning) that you should be aware of.