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Passive investing in index funds can generate returns that roughly match the overall market. But one can do better than that by picking better than average stocks (as part of a diversified portfolio). To wit, the AT&T Inc. (NYSE:T) share price is 57% higher than it was a year ago, much better than the market return of around 9.1% (not including dividends) in the same period. So that should have shareholders smiling. Having said that, the longer term returns aren't so impressive, with stock gaining just 29% in three years.
So let's investigate and see if the longer term performance of the company has been in line with the underlying business' progress.
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 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).
Over the last twelve months, AT&T actually shrank its EPS by 13%.
So we don't think that investors are paying too much attention to EPS. Indeed, when EPS is declining but the share price is up, it often means the market is considering other factors.
Absent any improvement, we don't think a thirst for dividends is pushing up the AT&T's share price. And at a glance the revenue growth does not impress, though a closer look at revenue trends may reveal some form of insight.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
AT&T is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. Given we have quite a good number of analyst forecasts, it might be well worth checking out this free chart depicting consensus estimates.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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, AT&T's TSR for the last 1 year was 65%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!