By buying an index fund, investors can approximate the average market return. But if you pick the right individual stocks, you could make more than that. For example, the Novo Nordisk A/S (CPH:NOVO B) share price is up 68% in the last three years, clearly besting the market return of around 29% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 23% in the last year , including dividends .
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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.
Novo Nordisk was able to grow its EPS at 3.1% per year over three years, sending the share price higher. In comparison, the 19% per year gain in the share price outpaces the EPS growth. So it's fair to assume the market has a higher opinion of the business than it did three years ago. It is quite common to see investors become enamoured with a business, after a few years of solid progress.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
Dive deeper into Novo Nordisk's key metrics by checking this interactive graph of Novo Nordisk's earnings, revenue and cash flow.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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, Novo Nordisk's TSR for the last 3 years was 81%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
It's good to see that Novo Nordisk has rewarded shareholders with a total shareholder return of 23% in the last twelve months. That's including the dividend. That gain is better than the annual TSR over five years, which is 5.2%. Therefore it seems like sentiment around the company has been positive lately. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. To that end, you should be aware of the 1 warning sign we've spotted with Novo Nordisk .
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on DK exchanges.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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