Low-cost index funds make it easy to achieve average market returns. But in any diversified portfolio of stocks, you'll see some that fall short of the average. For example, the Toll Brothers, Inc. (NYSE:TOL) share price return of 25% over three years lags the market return in the same period. Zooming in, the stock is up just 1.7% in the last year.
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 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 25% per year. The average annual share price increase of 7.8% is actually lower than the EPS growth. So it seems investors have become more cautious about the company, over time. This cautious sentiment is reflected in its (fairly low) P/E ratio of 7.70.
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 Toll Brothers has improved its bottom line lately, but is it going to grow revenue? Check if analysts think Toll Brothers will grow revenue in the future.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of Toll Brothers, it has a TSR of 28% 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
Toll Brothers shareholders are up 3.0% for the year (even including dividends). But that return falls short of the market. The silver lining is that the gain was actually better than the average annual return of 2.6% per year over five year. This could indicate that the company is winning over new investors, as it pursues its strategy. Before spending more time on Toll Brothers it might be wise to click here to see if insiders have been buying or selling shares.
We will like Toll Brothers better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.