By buying an index fund, investors can approximate the average market return. But if you choose individual stocks with prowess, you can make superior returns. For example, the Lonza Group AG (VTX:LONN) share price is up 10% in the last three years, clearly besting the market return of around 7.3% (not including dividends). On the other hand, the returns haven’t been quite so good recently, with shareholders up just 5.6%, including dividends.
Since it’s been a strong week for Lonza Group shareholders, let’s have a look at trend of the longer term fundamentals.
There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
Over the last three years, Lonza Group failed to grow earnings per share, which fell 5.4% (annualized).
The strong decline in earnings per share suggests the market isn’t using EPS to judge the company. So we’ll need to take a look at some different metrics to try to understand why the share price remains solid.
Languishing at just 0.7%, we doubt the dividend is doing much to prop up the share price. It may well be that Lonza Group revenue growth rate of 5.0% over three years has convinced shareholders to believe in a brighter future. If the company is being managed for the long term good, today’s shareholders might be right to hold on.
The company’s revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
Lonza Group is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. You can see what analysts are predicting for Lonza Group in this interactive graph of future profit estimates.
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. We note that for Lonza Group the TSR over the last 3 years was 12%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
We’re pleased to report that Lonza Group shareholders have received a total shareholder return of 5.6% over one year. That’s including the dividend. That’s better than the annualised return of 1.5% over half a decade, implying that the company is doing better recently. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. 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. Take risks, for example – Lonza Group has 2 warning signs we think you should be aware of.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Swiss 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.