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One simple way to benefit from the stock market is to buy an index fund. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. Just take a look at Tesco PLC (LON:TSCO), which is up 27%, over three years, soundly beating the market decline of 3.1% (not including dividends).
So let's investigate and see if the longer term performance of the company has been in line with the underlying business' progress.
View our latest analysis for Tesco
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
Tesco was able to grow its EPS at 31% per year over three years, sending the share price higher. The average annual share price increase of 8% is actually lower than the EPS growth. So it seems investors have become more cautious about the company, over time.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
It is of course excellent to see how Tesco has grown profits over the years, but the future is more important for shareholders. Take a more thorough look at Tesco's financial health with this free report on its balance sheet.
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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Tesco the TSR over the last 3 years was 44%, 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
It's good to see that Tesco has rewarded shareholders with a total shareholder return of 31% in the last twelve months. And that does include the dividend. That gain is better than the annual TSR over five years, which is 12%. Therefore it seems like sentiment around the company has been positive lately. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. To that end, you should be aware of the 1 warning sign we've spotted with Tesco .