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Earnings growth of 1.6% over 3 years hasn't been enough to translate into positive returns for Verizon Communications (NYSE:VZ) shareholders

For many investors, the main point of stock picking is to generate higher returns than the overall market. But its virtually certain that sometimes you will buy stocks that fall short of the market average returns. We regret to report that long term Verizon Communications Inc. (NYSE:VZ) shareholders have had that experience, with the share price dropping 42% in three years, versus a market return of about 39%. And more recent buyers are having a tough time too, with a drop of 36% in the last year. Furthermore, it's down 16% in about a quarter. That's not much fun for holders.

Since Verizon Communications has shed US$11b from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.

Check out our latest analysis for Verizon Communications

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.

Although the share price is down over three years, Verizon Communications actually managed to grow EPS by 4.9% per year in that time. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Alternatively, growth expectations may have been unreasonable in the past.

After considering the numbers, we'd posit that the the market had higher expectations of EPS growth, three years back. However, taking a look at other business metrics might shed a bit more light on the share price action.

We note that the dividend seems healthy enough, so that probably doesn't explain the share price drop. Verizon Communications has maintained its top line over three years, so we doubt that has shareholders worried. So it might be worth looking at how revenue growth over time, in greater detail.

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

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

Verizon Communications is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. You can see what analysts are predicting for Verizon Communications in this interactive graph of future profit estimates.

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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Verizon Communications, it has a TSR of -32% for the last 3 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

Verizon Communications shareholders are down 32% for the year (even including dividends), but the market itself is up 18%. 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 4% over the last half decade. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. It's always interesting to track share price performance over the longer term. But to understand Verizon Communications better, we need to consider many other factors. Take risks, for example - Verizon Communications has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Of course Verizon Communications may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

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

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

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.

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