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. For example, Absolute Software Corporation (TSE:ABT) shareholders have seen the share price rise 17% over three years, well in excess of the market return (5.5%, not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 5.8% in the last year , including dividends .
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
During the three years of share price growth, Absolute Software actually saw its earnings per share (EPS) drop 8.3% per year.
Thus, it seems unlikely that the market is focussed on EPS growth at the moment. Given this situation, it makes sense to look at other metrics too.
The dividend is no better now than it was three years ago, so that is unlikely to have driven the share price higher. It's much more likely that the fact that Absolute Software has been growing revenue at 3.9% a year is seen as a genuine positive. In that case, the revenue growth might be more important to shareholders, for now, thus justifying a higer share price.
The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
We know that Absolute Software has improved its bottom line lately, but what does the future have in store? This free report showing analyst forecasts should help you form a view on Absolute Software
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. As it happens, Absolute Software's TSR for the last 3 years was 32%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
It's good to see that Absolute Software has rewarded shareholders with a total shareholder return of 5.8% in the last twelve months. Of course, that includes the dividend. However, the TSR over five years, coming in at 7.4% per year, is even more impressive. If you would like to research Absolute Software in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on CA exchanges.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.