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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 Incitec Pivot Limited (ASX:IPL) share price is up 11% in the last three years, clearly besting the market return of around 3.8% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 15% in the last year, including dividends.
Now it's worth having a look at the company's fundamentals too, because that will help us determine if the long term shareholder return has matched the performance of the underlying business.
View our latest analysis for Incitec Pivot
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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.
Over the last three years, Incitec Pivot failed to grow earnings per share, which fell 7.5% (annualized). In this instance, recent extraordinary items impacted the earnings.
The strong decline in earnings per share suggests the market isn't using EPS to judge the company. So we'll need to take a look at some different metrics to try to understand why the share price remains solid.
We note that the dividend is higher than it was preciously, so that may have assisted the share price. It could be that the company is reaching maturity and dividend investors are buying for the yield. On top of that, revenue grew at a rate of 10% per year, and it's likely investors interpret that as pointing to a brighter future.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
Incitec Pivot is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. You can see what analysts are predicting for Incitec Pivot in this interactive graph of future profit estimates.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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, Incitec Pivot's TSR for the last 3 years was 44%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!