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Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, long term The Procter & Gamble Company (NYSE:PG) shareholders have enjoyed a 66% share price rise over the last half decade, well in excess of the market return of around 31% (not including dividends).
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.
View our latest analysis for Procter & Gamble
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 half a decade, Procter & Gamble managed to grow its earnings per share at 9.4% a year. This EPS growth is reasonably close to the 11% average annual increase in the share price. That suggests that the market sentiment around the company hasn't changed much over that time. Indeed, it would appear the share price is reacting to the EPS.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
It is of course excellent to see how Procter & Gamble has grown profits over the years, but the future is more important for shareholders. This free interactive report on Procter & Gamble's balance sheet strength is a great place to start, if you want to investigate the stock further.
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 Procter & Gamble the TSR over the last 5 years was 90%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
While it's never nice to take a loss, Procter & Gamble shareholders can take comfort that , including dividends,their trailing twelve month loss of 5.0% wasn't as bad as the market loss of around 22%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 14% for each year. It could be that the business is just facing some short term problems, but shareholders should keep a close eye on the fundamentals. It's always interesting to track share price performance over the longer term. But to understand Procter & Gamble better, we need to consider many other factors. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Procter & Gamble you should know about.