Many investors define successful investing as beating the market average over the long term. But the risk of stock picking is that you will likely buy under-performing companies. We regret to report that long term KKR Real Estate Finance Trust Inc. (NYSE:KREF) shareholders have had that experience, with the share price dropping 48% in three years, versus a market return of about 23%. And the share price decline continued over the last week, dropping some 5.3%. But this could be related to the soft market, which is down about 3.4% in the same period.
It’s worthwhile assessing if the company’s economics have been moving in lockstep with these underwhelming shareholder returns, or if there is some disparity between the two. So let’s do just that.
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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 five years of share price growth, KKR Real Estate Finance Trust moved from a loss to profitability. We would usually expect to see the share price rise as a result. So given the share price is down it’s worth checking some other metrics too.
It’s quite likely that the declining dividend has caused some investors to sell their shares, pushing the price lower in the process. The revenue decline, at an annual rate of 39% over three years, might be considered salt in the wound.
The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).
It’s probably worth noting that the CEO is paid less than the median at similar sized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. So it makes a lot of sense to check out what analysts think KKR Real Estate Finance Trust will earn in the future (free profit forecasts).
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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. As it happens, KKR Real Estate Finance Trust’s TSR for the last 3 years was -27%, which exceeds the share price return mentioned earlier. And there’s no prize for guessing that the dividend payments largely explain the divergence!
It’s good to see that KKR Real Estate Finance Trust has rewarded shareholders with a total shareholder return of 21% in the last twelve months. And that does include the dividend. Since the one-year TSR is better than the five-year TSR (the latter coming in at 5% per year), it would seem that the stock’s performance has improved in recent times. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. It’s always interesting to track share price performance over the longer term. But to understand KKR Real Estate Finance Trust better, we need to consider many other factors. For instance, we’ve identified 2 warning signs for KKR Real Estate Finance Trust (1 doesn’t sit too well with us) that you should be aware of.
If you would prefer to check out another company — one with potentially superior financials — then do not miss this free list of companies that have proven they can grow earnings.
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.