As an investor its worth striving to ensure your overall portfolio beats the market average. But the risk of stock picking is that you will likely buy under-performing companies. We regret to report that long term The Western Union Company (NYSE:WU) shareholders have had that experience, with the share price dropping 40% in three years, versus a market return of about 20%.
With that in mind, it's worth seeing if the company's underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just 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 the unfortunate three years of share price decline, Western Union actually saw its earnings per share (EPS) improve by 11% per year. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Alternatively, growth expectations may have been unreasonable in the past.
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.
Given the healthiness of the dividend payments, we doubt that they've concerned the market. However, the weak share price might be related to the fact revenue has been disappearing at a rate of 3.7% each year, over three years. In that case, the current EPS might be viewed by some as difficult to sustain.
You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).
Western Union is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. So we recommend checking out this free report showing consensus forecasts
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Western Union, it has a TSR of -29% for the last 3 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Western Union shareholders gained a total return of 6.5% during the year. But that was short of the market average. On the bright side, that's still a gain, and it is certainly better than the yearly loss of about 1.0% endured over half a decade. It could well be that the business is stabilizing. It's always interesting to track share price performance over the longer term. But to understand Western Union better, we need to consider many other factors. Take risks, for example - Western Union has 4 warning signs (and 3 which can't be ignored) we think you should know about.
Of course Western Union 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 American exchanges.
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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.