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The five-year decline in earnings might be taking its toll on Assured Guaranty (NYSE:AGO) shareholders as stock falls 5.5% over the past week

·3 min read

Assured Guaranty Ltd. (NYSE:AGO) shareholders might be concerned after seeing the share price drop 15% in the last month. But at least the stock is up over the last five years. Unfortunately its return of 41% is below the market return of 86%.

Since the long term performance has been good but there's been a recent pullback of 5.5%, let's check if the fundamentals match the share price.

Check out our latest analysis for Assured Guaranty

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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.

Assured Guaranty's earnings per share are down 2.2% per year, despite strong share price performance over five years.

So it's hard to argue that the earnings per share are the best metric to judge the company, as it may not be optimized for profits at this point. Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.

We doubt the modest 1.8% dividend yield is attracting many buyers to the stock. It is not great to see that revenue has dropped by 16% per year over five years. So it seems one might have to take closer look at earnings and revenue trends to see how they might influence the share price.

You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).

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

We know that Assured Guaranty has improved its bottom line lately, but what does the future have in store? This free report showing analyst forecasts should help you form a view on Assured Guaranty

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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 and spin-offs. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Assured Guaranty's TSR for the last 5 years was 55%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

It's nice to see that Assured Guaranty shareholders have received a total shareholder return of 10% over the last year. That's including the dividend. That gain is better than the annual TSR over five years, which is 9%. Therefore it seems like sentiment around the company has been positive lately. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example - Assured Guaranty has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

Of course Assured Guaranty 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 US exchanges.

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

This article by Simply Wall St 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. Simply Wall St has no position in any stocks mentioned.