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Did Discover Financial Services's (NYSE:DFS) Share Price Deserve to Gain 40%?

Simply Wall St

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Vanguard founder Jack Bogle helped spearhead the low-cost index fund, putting average returns within reach of every investor. But if you pick the right individual stocks, you could make more than that. Notably, the Discover Financial Services (NYSE:DFS) share price has gained 40% in three years, which is better than the average market return. More recently the stock has gained 15% in a year, which isn't too bad.

Check out our latest analysis for Discover Financial Services

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 imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

During three years of share price growth, Discover Financial Services achieved compound earnings per share growth of 16% per year. The average annual share price increase of 12% is actually lower than the EPS growth. Therefore, it seems the market has moderated its expectations for growth, somewhat. We'd venture the lowish P/E ratio of 9.89 also reflects the negative sentiment around the stock.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

NYSE:DFS Past and Future Earnings, July 12th 2019

We like that insiders have been buying shares in the last twelve months. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. It might be well worthwhile taking a look at our free report on Discover Financial Services's earnings, revenue and cash flow.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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 Discover Financial Services, it has a TSR of 49% for the last 3 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!

A Different Perspective

It's nice to see that Discover Financial Services shareholders have received a total shareholder return of 18% over the last year. That's including the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 6.9% per year), it would seem that the stock's performance has improved in recent times. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. Investors who like to make money usually check up on insider purchases, such as the price paid, and total amount bought. You can find out about the insider purchases of Discover Financial Services by clicking this link.

Discover Financial Services is not the only stock that insiders are buying. 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 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.