One simple way to benefit from the stock market is to buy an index fund. But if you choose individual stocks with prowess, you can make superior returns. For example, Hillenbrand, Inc. (NYSE:HI) shareholders have seen the share price rise 49% over three years, well in excess of the market return (38%, not including dividends).
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it’s a weighing machine. 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.
Over the last three years, Hillenbrand failed to grow earnings per share, which fell 5.1% (annualized). This means it’s unlikely the market is judging the company based on earnings growth. 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.
Languishing at just 1.9%, we doubt the dividend is doing much to prop up the share price. It could be that the revenue growth of 5.8% per year is viewed as evidence that Hillenbrand is growing. In that case, the company may be sacrificing current earnings per share to drive growth, and maybe shareholder’s faith in better days ahead will be rewarded.
The chart below shows how revenue and earnings have changed with time, (if you click on the chart you can see the actual values).
Balance sheet strength is crucual. It might be well worthwhile taking a look at our free report on how its financial position has changed over time.
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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Hillenbrand the TSR over the last 3 years was 58%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
While the broader market gained around 3.0% in the last year, Hillenbrand shareholders lost 4.8% (even including dividends). However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn’t be so upset, since they would have made 8.5%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. Before deciding if you like the current share price, check how Hillenbrand scores on these 3 valuation metrics.
Of course Hillenbrand 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.
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.