U.S. markets open in 5 hours 9 minutes
  • S&P Futures

    3,809.75
    -29.25 (-0.76%)
     
  • Dow Futures

    31,372.00
    -93.00 (-0.30%)
     
  • Nasdaq Futures

    12,438.50
    -225.25 (-1.78%)
     
  • Russell 2000 Futures

    2,172.90
    -16.80 (-0.77%)
     
  • Crude Oil

    66.55
    +0.46 (+0.70%)
     
  • Gold

    1,689.20
    -9.30 (-0.55%)
     
  • Silver

    25.35
    +0.06 (+0.25%)
     
  • EUR/USD

    1.1875
    -0.0050 (-0.42%)
     
  • 10-Yr Bond

    1.5540
    0.0000 (0.00%)
     
  • Vix

    27.76
    -0.81 (-2.84%)
     
  • GBP/USD

    1.3822
    -0.0006 (-0.04%)
     
  • USD/JPY

    108.5000
    +0.1180 (+0.11%)
     
  • BTC-USD

    49,752.75
    -749.52 (-1.48%)
     
  • CMC Crypto 200

    1,004.58
    +61.41 (+6.51%)
     
  • FTSE 100

    6,659.82
    +29.30 (+0.44%)
     
  • Nikkei 225

    28,743.25
    -121.07 (-0.42%)
     

Diageo (LON:DGE) Has Compensated Shareholders With A Respectable 79% Return On Their Investment

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
Simply Wall St
·3 min read
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, the Diageo plc (LON:DGE) share price is up 58% in the last 5 years, clearly besting the market return of around 14% (ignoring dividends).

See our latest analysis for Diageo

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just 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.

Diageo's earnings per share are down 8.8% per year, despite strong share price performance over five years.

Essentially, it doesn't seem likely that investors are focused on EPS. Because earnings per share don't seem to match up with the share price, we'll take a look at other metrics instead.

In contrast revenue growth of 4.2% per year is probably viewed as evidence that Diageo is growing, a real positive. It's quite possible that management are prioritizing revenue growth over EPS growth at the moment.

You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).

earnings-and-revenue-growth
earnings-and-revenue-growth

We consider it positive that insiders have made significant purchases in the last year. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. If you are thinking of buying or selling Diageo stock, you should check out this free report showing analyst profit forecasts.

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Diageo, it has a TSR of 79% for the last 5 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

While the broader market lost about 4.7% in the twelve months, Diageo shareholders did even worse, losing 9.0% (even including dividends). However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there's a good opportunity. On the bright side, long term shareholders have made money, with a gain of 12% per year over half a decade. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Diageo (of which 1 is a bit concerning!) you should know about.

Diageo is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB exchanges.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.