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If you want to compound wealth in the stock market, you can do so by buying an index fund. But you can significantly boost your returns by picking above-average stocks. To wit, the NZX Limited (NZSE:NZX) share price is 28% higher than it was a year ago, much better than the market decline of around 2.1% (not including dividends) in the same period. So that should have shareholders smiling. However, the longer term returns haven't been so impressive, with the stock up just 15% in the last three years.
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.
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
During the last year NZX grew its earnings per share (EPS) by 86%. It's fair to say that the share price gain of 28% did not keep pace with the EPS growth. So it seems like the market has cooled on NZX, despite the growth. Interesting.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We know that NZX has improved its bottom line lately, but is it going to grow revenue? Check if analysts think NZX 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, NZX's TSR for the last 1 year was 34%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
It's good to see that NZX has rewarded shareholders with a total shareholder return of 34% in the last twelve months. Of course, that includes the dividend. That's better than the annualised return of 9% over half a decade, implying that the company is doing better recently. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. It's always interesting to track share price performance over the longer term. But to understand NZX better, we need to consider many other factors. For example, we've discovered 1 warning sign for NZX that you should be aware of before investing here.