Pulling back 6.8% this week, Meridian Energy's NZSE:MEL) five-year decline in earnings may be coming into investors focus
Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And in our experience, buying the right stocks can give your wealth a significant boost. For example, long term Meridian Energy Limited (NZSE:MEL) shareholders have enjoyed a 36% share price rise over the last half decade, well in excess of the market decline of around 0.9% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 10% in the last year , including dividends .
Although Meridian Energy has shed NZ$1.0b from its market cap this week, let's take a look at its longer term fundamental trends and see if they've driven returns.
See our latest analysis for Meridian Energy
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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.
Meridian Energy's earnings per share are down 19% per year, despite strong share price performance over five years.
This means it's unlikely the market is judging the company based on earnings growth. Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.
We are not particularly impressed by the annual compound revenue growth of 1.8% over five years. So why is the share price up? It's not immediately obvious to us, but a closer look at the company's progress over time might yield answers.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Meridian Energy the TSR over the last 5 years was 71%, 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 nice to see that Meridian Energy shareholders have received a total shareholder return of 10% over the last year. And that does include the dividend. However, the TSR over five years, coming in at 11% per year, is even more impressive. It's always interesting to track share price performance over the longer term. But to understand Meridian Energy better, we need to consider many other factors. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Meridian Energy (of which 1 is potentially serious!) you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on New Zealander exchanges.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
