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When you buy a stock there is always a possibility that it could drop 100%. But on the bright side, if you buy shares in a high quality company at the right price, you can gain well over 100%. Long term Federal Agricultural Mortgage Corporation (NYSE:AGM) shareholders would be well aware of this, since the stock is up 122% in five years. We note the stock price is up 1.4% in the last seven days.
So let's investigate and see if the longer term performance of the company has been in line with the underlying business' progress.
See our latest analysis for Federal Agricultural Mortgage
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 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.
During five years of share price growth, Federal Agricultural Mortgage achieved compound earnings per share (EPS) growth of 13% per year. This EPS growth is lower than the 17% average annual increase in the share price. So it's fair to assume the market has a higher opinion of the business than it did five years ago. That's not necessarily surprising considering the five-year track record of earnings growth.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
We know that Federal Agricultural Mortgage has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Federal Agricultural Mortgage's TSR for the last 5 years was 165%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
Federal Agricultural Mortgage shareholders gained a total return of 18% during the year. Unfortunately this falls short of the market return. If we look back over five years, the returns are even better, coming in at 22% per year for five years. It's quite possible the business continues to execute with prowess, even as the share price gains are slowing. It's always interesting to track share price performance over the longer term. But to understand Federal Agricultural Mortgage better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Federal Agricultural Mortgage (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.