In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But even the best stock picker will only win with some selections. So we wouldn't blame long term China Life Insurance Company Limited (HKG:2628) shareholders for doubting their decision to hold, with the stock down 14% over a half decade. Unhappily, the share price slid 4.8% in the last week.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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).
While the share price declined over five years, China Life Insurance actually managed to increase EPS by an average of 3.6% per year. So it doesn't seem like EPS is a great guide to understanding how the market is valuing the stock. Or possibly, the market was previously very optimistic, so the stock has disappointed, despite improving EPS. Given that EPS has increased, but the share price has fallen, it's fair to say that market sentiment around the stock has become more negative. That said, if EPS continues to increase, it seems very likely the share price will get a boost, in the long term.
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 China Life Insurance has improved its bottom line over the last three years, but what does the future have in store? Take a more thorough look at China Life Insurance's financial health with this free report on its balance sheet.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for China Life Insurance the TSR over the last 5 years was -6.7%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
It's good to see that China Life Insurance has rewarded shareholders with a total shareholder return of 6.1% in the last twelve months. Of course, that includes the dividend. That certainly beats the loss of about 1.4% per year over the last half decade. We generally put more weight on the long term performance over the short term, but the recent improvement could hint at a (positive) inflection point within the business. Before forming an opinion on China Life Insurance you might want to consider these 3 valuation metrics.
Of course China Life Insurance 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 HK 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.