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Did Changing Sentiment Drive Schlumberger's (NYSE:SLB) Share Price Down A Worrying 64%?

Simply Wall St

Generally speaking long term investing is the way to go. But no-one is immune from buying too high. To wit, the Schlumberger Limited (NYSE:SLB) share price managed to fall 64% over five long years. That's not a lot of fun for true believers. We also note that the stock has performed poorly over the last year, with the share price down 40%. The good news is that the stock is up 2.9% in the last week.

Check out our latest analysis for Schlumberger

To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.

During five years of share price growth, Schlumberger moved from a loss to profitability. That would generally be considered a positive, so we are surprised to see the share price is down. Other metrics may better explain the share price move.

The steady dividend doesn't really explain why the share price is down. However, revenue has declined at a compound annual rate of 9.6% per year. With revenue weak, and increased payouts of cash, the market might be taking the view that its best days are behind it.

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

NYSE:SLB Income Statement, July 24th 2019

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. So it makes a lot of sense to check out what analysts think Schlumberger will earn in the future (free profit forecasts).

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Schlumberger, it has a TSR of -58% 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

Schlumberger shareholders are down 37% for the year (even including dividends), but the market itself is up 5.5%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 16% over the last half decade. We realise that Buffett has said investors should 'buy when there is blood on the streets', but we caution that investors should first be sure they are buying a high quality businesses. If you want to research this stock further, the data on insider buying is an obvious place to start. You can click here to see who has been buying shares - and the price they paid.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US 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 editorial-team@simplywallst.com. 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.