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Stock pickers are generally looking for stocks that will outperform the broader market. Buying under-rated businesses is one path to excess returns. For example, the SDI Limited (ASX:SDI) share price is up 42% in the last 5 years, clearly besting the market return of around 14% (ignoring dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 4.6% in the last year , including dividends .
Now it's worth having a look at the company's fundamentals too, because that will help us determine if the long term shareholder return has matched the performance of the underlying business.
View our latest analysis for SDI
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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.
During five years of share price growth, SDI achieved compound earnings per share (EPS) growth of 4.5% per year. This EPS growth is lower than the 7% average annual increase in the share price. So it's fair to assume the market has a higher opinion of the business than it did five years ago. And that's hardly shocking given the track record of growth.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
It might be well worthwhile taking a look at our free report on SDI'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 is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for SDI the TSR over the last 5 years was 70%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
SDI provided a TSR of 4.6% over the year (including dividends). That's fairly close to the broader market return. We should note here that the five-year TSR is more impressive, at 11% per year. Although the share price growth has slowed, the longer term story points to a business well worth watching. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with SDI (at least 1 which is significant) , and understanding them should be part of your investment process.