Low-cost index funds make it easy to achieve average market returns. But across the board there are plenty of stocks that underperform the market. For example, the Omega Healthcare Investors, Inc. (NYSE:OHI) share price return of 30% over three years lags the market return in the same period. In the last year the stock has gained 20%.
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. 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 three years of share price growth, Omega Healthcare Investors achieved compound earnings per share growth of 1.0% per year. This EPS growth is lower than the 9.1% average annual increase in the share price. 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.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We know that Omega Healthcare Investors has improved its bottom line lately, but is it going to grow revenue? If you're interested, you could check this free report showing consensus revenue forecasts.
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. As it happens, Omega Healthcare Investors's TSR for the last 3 years was 65%, 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
Omega Healthcare Investors shareholders have received returns of 28% over twelve months (even including dividends) , which isn't far from the general market return. That gain looks pretty satisfying, and it is even better than the five-year TSR of 7.4% per year. Even if the share price growth slows down from here, there's a good chance that this is business worth watching in the long term. If you would like to research Omega Healthcare Investors 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 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.
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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