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One simple way to benefit from the stock market is to buy an index fund. But many of us dare to dream of bigger returns, and build a portfolio ourselves. For example, National Grid plc (LON:NG.) shareholders have seen the share price rise 11% over three years, well in excess of the market return (1.3%, not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 18%, including dividends.
With that in mind, it's worth seeing if the company's underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.
View our latest analysis for National Grid
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.
National Grid was able to grow its EPS at 7.0% per year over three years, sending the share price higher. This EPS growth is higher than the 4% average annual increase in the share price. So one could reasonably conclude that the market has cooled on the stock.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
Dive deeper into National Grid's key metrics by checking this interactive graph of National Grid's earnings, revenue and cash flow.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. In the case of National Grid, it has a TSR of 42% for the last 3 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
It's good to see that National Grid has rewarded shareholders with a total shareholder return of 18% in the last twelve months. And that does include the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 9% per year), it would seem that the stock's performance has improved in recent times. 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. Case in point: We've spotted 5 warning signs for National Grid you should be aware of, and 2 of them are concerning.