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If you are building a properly diversified stock portfolio, the chances are some of your picks will perform badly. But long term NIKE, Inc. (NYSE:NKE) shareholders have had a particularly rough ride in the last three year. Unfortunately, they have held through a 54% decline in the share price in that time. And over the last year the share price fell 39%, so we doubt many shareholders are delighted. Furthermore, it's down 23% in about a quarter. That's not much fun for holders. However, one could argue that the price has been influenced by the general market, which is down 10% in the same timeframe.
Now let's have a look at the company's fundamentals, and see if the long term shareholder return has matched the performance of the underlying business.
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...' 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.
NIKE saw its EPS decline at a compound rate of 7.6% per year, over the last three years. This reduction in EPS is slower than the 23% annual reduction in the share price. So it seems the market was too confident about the business, in the past.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
This free interactive report on NIKE's earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for NIKE the TSR over the last 3 years was -52%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
While the broader market gained around 9.0% in the last year, NIKE shareholders lost 38% (even including dividends). Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 5% per year over five years. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. Is NIKE cheap compared to other companies? These 3 valuation measures might help you decide.