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, M.D.C. Holdings, Inc. (NYSE:MDC) shareholders have seen the share price rise 74% over three years, well in excess of the market return (36%, not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 17%, including dividends.
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There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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.
During three years of share price growth, M.D.C. Holdings achieved compound earnings per share growth of 46% per year. This EPS growth is higher than the 20% average annual increase in the share price. Therefore, it seems the market has moderated its expectations for growth, somewhat. This cautious sentiment is reflected in its (fairly low) P/E ratio of 9.13.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
We know that M.D.C. Holdings has improved its bottom line over the last three years, but what does the future have in store? If you are thinking of buying or selling M.D.C. Holdings stock, you should check out this FREE detailed report on its balance sheet.
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. As it happens, M.D.C. Holdings's TSR for the last 3 years was 93%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
We're pleased to report that M.D.C. Holdings shareholders have received a total shareholder return of 17% over one year. And that does include the dividend. That gain is better than the annual TSR over five years, which is 11%. 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. If you would like to research M.D.C. Holdings in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.
If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.
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 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. Thank you for reading.