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If you buy and hold a stock for many years, you'd hope to be making a profit. Better yet, you'd like to see the share price move up more than the market average. But Electronic Arts Inc. (NASDAQ:EA) has fallen short of that second goal, with a share price rise of 24% over five years, which is below the market return. Over the last twelve months the stock price has risen a very respectable 13%.
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.
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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).
Electronic Arts' earnings per share are down 16% per year, despite strong share price performance over five years.
The strong decline in earnings per share suggests the market isn't using EPS to judge the company. The falling EPS doesn't correlate with the climbing share price, so it's worth taking a look at other metrics.
We doubt the modest 0.5% dividend yield is attracting many buyers to the stock. In contrast revenue growth of 7.5% per year is probably viewed as evidence that Electronic Arts is growing, a real positive. In that case, the company may be sacrificing current earnings per share to drive growth.
You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).
Electronic Arts is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. 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?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Electronic Arts the TSR over the last 5 years was 27%, 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!