Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And in our experience, buying the right stocks can give your wealth a significant boost. For example, long term Ameriprise Financial, Inc. (NYSE:AMP) shareholders have enjoyed a 90% share price rise over the last half decade, well in excess of the market return of around 48% (not including dividends). On the other hand, the more recent gains haven't been so impressive, with shareholders gaining just 2.7% , including dividends .
While this past week has detracted from the company's five-year return, let's look at the recent trends of the underlying business and see if the gains have been in alignment.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just 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.
During five years of share price growth, Ameriprise Financial achieved compound earnings per share (EPS) growth of 28% per year. This EPS growth is higher than the 14% average annual increase in the share price. Therefore, it seems the market has become relatively pessimistic about the company. This cautious sentiment is reflected in its (fairly low) P/E ratio of 9.06.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
We know that Ameriprise Financial has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.
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. As it happens, Ameriprise Financial's TSR for the last 5 years was 114%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
It's nice to see that Ameriprise Financial shareholders have received a total shareholder return of 2.7% over the last year. That's including the dividend. However, the TSR over five years, coming in at 16% per year, is even more impressive. The pessimistic view would be that be that the stock has its best days behind it, but on the other hand the price might simply be moderating while the business itself continues to execute. It's always interesting to track share price performance over the longer term. But to understand Ameriprise Financial better, we need to consider many other factors. For instance, we've identified 1 warning sign for Ameriprise Financial that you should be aware of.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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