It might be of some concern to shareholders to see the NRG Energy, Inc. (NYSE:NRG) share price down 15% in the last month. But the silver lining is the stock is up over five years. However we are not very impressed because the share price is only up 64%, less than the market return of 68%.
Although NRG Energy has shed US$318m from its market cap this week, let's take a look at its longer term fundamental trends and see if they've driven returns.
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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 the five years of share price growth, NRG Energy moved from a loss to profitability. That's generally thought to be a genuine positive, so we would expect to see an increasing share price. Since the company was unprofitable five years ago, but not three years ago, it's worth taking a look at the returns in the last three years, too. We can see that the NRG Energy share price is up 5.2% in the last three years. During the same period, EPS grew by 164% each year. This EPS growth is higher than the 1.7% average annual increase in the share price over the same three years. 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 2.22.
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 NRG Energy has improved its bottom line over the last three years, but what does the future have in store? This free interactive report on NRG Energy's balance sheet strength is a great place to start, if you want to investigate the stock further.
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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of NRG Energy, it has a TSR of 80% for the last 5 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
While it's certainly disappointing to see that NRG Energy shares lost 6.0% throughout the year, that wasn't as bad as the market loss of 17%. Longer term investors wouldn't be so upset, since they would have made 12%, each year, over five years. It could be that the business is just facing some short term problems, but shareholders should keep a close eye on the fundamentals. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Even so, be aware that NRG Energy is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...
Of course NRG Energy 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 US 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.
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