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Many investors define successful investing as beating the market average over the long term. But the risk of stock picking is that you will likely buy under-performing companies. We regret to report that long term Rathbones Group Plc (LON:RAT) shareholders have had that experience, with the share price dropping 27% in three years, versus a market decline of about 11%.
While the last three years has been tough for Rathbones Group shareholders, this past week has shown signs of promise. So let's look at the longer term fundamentals and see if they've been the driver of the negative returns.
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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 that the share price fell, Rathbones Group's earnings per share (EPS) dropped by 22% each year. This fall in the EPS is worse than the 10% compound annual share price fall. So, despite the prior disappointment, shareholders must have some confidence the situation will improve, longer term.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We know that Rathbones Group has improved its bottom line lately, but is it going to grow revenue? You could check out this free report showing analyst revenue forecasts.
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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Rathbones Group's TSR for the last 3 years was -12%, 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
Rathbones Group provided a TSR of 5.3% over the last twelve months. But that was short of the market average. It's probably a good sign that the company has an even better long term track record, having provided shareholders with an annual TSR of 8% over five years. Maybe the share price is just taking a breather while the business executes on its growth strategy. It's always interesting to track share price performance over the longer term. But to understand Rathbones Group better, we need to consider many other factors. Take risks, for example - Rathbones Group has 2 warning signs we think you should be aware of.