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. Unfortunately for shareholders, while the Toll Brothers, Inc. (NYSE:TOL) share price is up 24% in the last three years, that falls short of the market return. Zooming in, the stock is actually down 19% in the last year.
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There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One way to examine how market sentiment has changed over time is to look at the interaction between a company’s share price and its earnings per share (EPS).
During three years of share price growth, Toll Brothers achieved compound earnings per share growth of 34% per year. The average annual share price increase of 7.5% is actually lower than the EPS growth. Therefore, it seems the market has moderated its expectations for growth, somewhat. We’d venture the lowish P/E ratio of 7.29 also reflects the negative sentiment around the stock.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
It is of course excellent to see how Toll Brothers has grown profits over the years, but the future is more important for shareholders. This free interactive report on Toll Brothers’s balance sheet strength 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 and spin-offs. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Toll Brothers the TSR over the last 3 years was 27%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
Investors in Toll Brothers had a tough year, with a total loss of 18% (including dividends), against a market gain of about 8.5%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. On the bright side, long term shareholders have made money, with a gain of 0.2% per year over half a decade. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. 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.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.