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Lowe's Companies, Inc. (NYSE:LOW) shareholders might be concerned after seeing the share price drop 11% in the last quarter. But that doesn't change the fact that the returns over the last five years have been very strong. We think most investors would be happy with the 136% return, over that period. Generally speaking the long term returns will give you a better idea of business quality than short periods can. The more important question is whether the stock is too cheap or too expensive today.
On the back of a solid 7-day performance, let's check what role the company's fundamentals have played in driving long term shareholder returns.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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.
Over half a decade, Lowe's Companies managed to grow its earnings per share at 18% a year. So the EPS growth rate is rather close to the annualized share price gain of 19% per year. This indicates that investor sentiment towards the company has not changed a great deal. In fact, the share price seems to largely reflect the EPS growth.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
We consider it positive that insiders have made significant purchases in the last year. Even so, future earnings will be far more important to whether current shareholders make money. It might be well worthwhile taking a look at our free report on Lowe's Companies' earnings, revenue and cash flow.
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. As it happens, Lowe's Companies' TSR for the last 5 years was 158%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
Lowe's Companies shareholders are down 0.8% for the year (even including dividends), but the market itself is up 7.4%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn't be so upset, since they would have made 21%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. 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. For example, we've discovered 2 warning signs for Lowe's Companies (1 doesn't sit too well with us!) that you should be aware of before investing here.