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By buying an index fund, you can roughly match the market return with ease. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. For example, Severn Trent Plc (LON:SVT) shareholders have seen the share price rise 35% over three years, well in excess of the market decline (4.8%, not including dividends).
View our latest analysis for Severn Trent
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.
During the three years of share price growth, Severn Trent actually saw its earnings per share (EPS) drop 27% per year.
So we doubt that the market is looking to EPS for its main judge of the company's value. Therefore, we think it's worth considering other metrics as well.
We note that the dividend is higher than it was preciously, so that may have assisted the share price. Sometimes yield-chasing investors will flock to a company if they think the dividend can grow over time. The revenue growth of about 3.4% per year might also encourage buyers.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
We consider it positive that insiders have made significant purchases in the last year. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. So we recommend checking out this free report showing consensus forecasts
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Severn Trent's TSR for the last 3 years was 54%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
We regret to report that Severn Trent shareholders are down 6.9% for the year (even including dividends). Unfortunately, that's worse than the broader market decline of 4.6%. Having said that, it's inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. On the bright side, long term shareholders have made money, with a gain of 6% per year over half a decade. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. It's always interesting to track share price performance over the longer term. But to understand Severn Trent better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Severn Trent (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.