U.S. Markets open in 56 mins
  • S&P Futures

    4,268.25
    -18.25 (-0.43%)
     
  • Dow Futures

    33,878.00
    -103.00 (-0.30%)
     
  • Nasdaq Futures

    13,451.50
    -71.75 (-0.53%)
     
  • Russell 2000 Futures

    1,990.70
    -11.00 (-0.55%)
     
  • Crude Oil

    89.75
    -0.75 (-0.83%)
     
  • Gold

    1,767.40
    -3.80 (-0.21%)
     
  • Silver

    19.19
    -0.27 (-1.41%)
     
  • EUR/USD

    1.0095
    +0.0003 (+0.0303%)
     
  • 10-Yr Bond

    2.8800
    0.0000 (0.00%)
     
  • Vix

    20.11
    +0.21 (+1.06%)
     
  • GBP/USD

    1.1914
    -0.0019 (-0.1596%)
     
  • USD/JPY

    136.6400
    +0.7780 (+0.5726%)
     
  • BTC-USD

    21,388.61
    -2,129.46 (-9.05%)
     
  • CMC Crypto 200

    507.54
    -50.19 (-9.00%)
     
  • FTSE 100

    7,537.54
    -4.31 (-0.06%)
     
  • Nikkei 225

    28,930.33
    -11.81 (-0.04%)
     

Home Depot's (NYSE:HD) 16% CAGR outpaced the company's earnings growth over the same five-year period

  • Oops!
    Something went wrong.
    Please try again later.
·3 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Stock pickers are generally looking for stocks that will outperform the broader market. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. To wit, the Home Depot share price has climbed 84% in five years, easily topping the market return of 53% (ignoring dividends).

On the back of a solid 7-day performance, let's check what role the company's fundamentals have played in driving long term shareholder returns.

See our latest analysis for Home Depot

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

During five years of share price growth, Home Depot achieved compound earnings per share (EPS) growth of 19% per year. This EPS growth is higher than the 13% average annual increase in the share price. Therefore, it seems the market has become relatively pessimistic about the company.

The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).

earnings-per-share-growth
earnings-per-share-growth

It's probably worth noting we've seen significant insider buying in the last quarter, which we consider a positive. That said, we think earnings and revenue growth trends are even more important factors to consider. Dive deeper into the earnings by checking this interactive graph of Home Depot'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 incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Home Depot the TSR over the last 5 years was 107%, 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 it's certainly disappointing to see that Home Depot shares lost 7.8% throughout the year, that wasn't as bad as the market loss of 17%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 16% for each year. It could be that the business is just facing some short term problems, but shareholders should keep a close eye on the fundamentals. It's always interesting to track share price performance over the longer term. But to understand Home Depot better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Home Depot , and understanding them should be part of your investment process.

Home Depot is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.