Stock pickers typically look for stocks that will outperform the broader market. And while active security selection comes with risk (and requires diversification), it can also generate excess returns. For example, the adidas AG The share price (ETR: ADS) has risen 98% over the past 5 years, clearly outperforming the market return by around 33% (ignoring dividends). In contrast, the most recent gains have not been as impressive, with shareholders earning just 19% including dividends.
While the past week has hurt the company’s five-year performance, let’s take a look at recent trends in underlying business and see if the gains have been aligned.
See our latest review for adidas
To paraphrase Benjamin Graham: In the short term the market is a voting machine, but in the long term it is a weighing machine. An imperfect but reasonable way to gauge how sentiment is changing around a company is to compare earnings per share (EPS) with the stock price.
Over the five years of share price growth, adidas has achieved compound earnings per share (EPS) growth of 10% per year. This EPS growth is slower than the share price growth of 15% per year, over the same period. This suggests that market participants hold society in the highest regard these days. This isn’t necessarily surprising given the track record of five-year earnings growth.
The graph below illustrates the evolution of EPS over time (reveal the exact values by clicking on the image).
We know adidas has improved its results lately, but will it increase its revenue? You could check that out free report showing analysts’ earnings forecasts.
What about dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. While the share price return reflects only the change in the share price, the TSR includes the value of dividends (assuming they have been reinvested) and the benefit of any capital increase or spin- off updated. It’s fair to say that the TSR gives a more complete picture of dividend paying stocks. As it turns out, adidas’ TSR over the past 5 years was 108%, which exceeds the share price performance mentioned earlier. The dividends paid by the company thus boosted the total shareholder return.
A different perspective
Adidas shareholders achieved a total return of 19% during the year. But it was below the market average. The silver lining is that the payout was actually better than the average annual return of 16% per year over five years. This could indicate that the company is attracting new investors, while pursuing its strategy. While it is worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Consider risks, for example. Every business has them, and we’ve spotted 2 warning signs for adidas you should know.
If you like to buy stocks alongside management then you might love this free list of companies. (Hint: insiders bought them).
Please note that the market returns quoted in this article reflect the market-weighted average returns of stocks that currently trade on the DE stock exchanges.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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