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By buying an index fund, investors can approximate the average market return. But many of us dare to dream of bigger returns, and build a portfolio ourselves. For example, the Emerson Electric Co. (NYSE:EMR) share price is up 45% in the last three years, clearly besting the market return of around 33% (not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 18% , including dividends .
Since the stock has added US$1.8b to its market cap in the past week alone, let's see if underlying performance has been driving long-term returns.
View our latest analysis for Emerson Electric
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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.
Emerson Electric was able to grow its EPS at 13% per year over three years, sending the share price higher. This EPS growth is remarkably close to the 13% average annual increase in the share price. That suggests that the market sentiment around the company hasn't changed much over that time. Rather, the share price has approximately tracked EPS growth.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
We know that Emerson Electric has improved its bottom line lately, but is it going to grow revenue? Check if analysts think Emerson Electric will grow revenue in the future.
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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Emerson Electric the TSR over the last 3 years was 56%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
Emerson Electric shareholders have received returns of 18% over twelve months (even including dividends), which isn't far from the general market return. That gain looks pretty satisfying, and it is even better than the five-year TSR of 9% per year. Even if the share price growth slows down from here, there's a good chance that this is business worth watching in the long term. 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 Emerson Electric (at least 1 which can't be ignored) , and understanding them should be part of your investment process.