When we invest, we’re generally looking for stocks that outperform the market average. Buying under-rated businesses is one path to excess returns. To wit, the Merck KGaA share price has climbed 60% in five years, easily topping the market return of 7.1% (ignoring dividends). However, more recent returns haven’t been as impressive as that, with the stock returning just 4.2% in the last year, including dividends.
While the stock has fallen 4.1% this week, it’s worth focusing on the longer term and seeing if the stocks historical returns have been driven by the underlying fundamentals.
See our latest analysis for Merck KGaA
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 five years of share price growth, Merck KGaA achieved compound earnings per share (EPS) growth of 19% per year. The EPS growth is more impressive than the yearly share price gain of 10% over the same period. So it seems the market isn’t so enthusiastic about the stock these days.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
It might be well worthwhile taking a look at our free report on Merck KGaA’s earnings, revenue and cash flow.
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 incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Merck KGaA, it has a TSR of 70% for the last 5 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
Merck KGaA provided a TSR of 4.2% over the last twelve months. But that return falls short of the market. On the bright side, the longer term returns (running at about 11% a year, over half a decade) look better. It’s quite possible the business continues to execute with prowess, even as the share price gains are slowing. Before forming an opinion on Merck KGaA you might want to consider these 3 valuation metrics.
If you are like me, then you will not want to miss this free list of undervalued small caps that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on German 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.
