Buying a low-cost index fund will get you the average market return. But in any diversified portfolio of stocks, you’ll see some that fall short of the average. That’s what has happened with the Eaton Corporation plc (NYSE:ETN) share price. It’s up 38% over three years, but that is below the market return. In the last year the stock price gained, albeit only 1.3%.
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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.
Eaton was able to grow its EPS at 5.2% per year over three years, sending the share price higher. In comparison, the 11% per year gain in the share price outpaces the EPS growth. This suggests that, as the business progressed over the last few years, it gained the confidence of market participants. That’s not necessarily surprising considering the three-year track record of earnings growth.
The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).
This free interactive report on Eaton’s earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Eaton, it has a TSR of 51% for the last 3 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
It’s nice to see that Eaton shareholders have received a total shareholder return of 4.9% over the last year. That’s including the dividend. However, that falls short of the 4.9% TSR per annum it has made for shareholders, each year, over five years. Most investors take the time to check the data on insider transactions. You can click here to see if insiders have been buying or selling.
We will like Eaton better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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 email@example.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.