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, Baby Bunting Group Limited (ASX:BBN) shareholders have seen the share price rise 78% over three years, well in excess of the market return (1.4%, not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 56% in the last year , including dividends .
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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 three years of share price growth, Baby Bunting Group achieved compound earnings per share growth of 2.8% per year. This EPS growth is lower than the 21% average annual increase in the share price. This suggests that, as the business progressed over the last few years, it gained the confidence of market participants. That's not necessarily surprising considering the three-year track record of earnings growth.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. Dive deeper into the earnings by checking this interactive graph of Baby Bunting Group's earnings, revenue and cash flow.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. In the case of Baby Bunting Group, it has a TSR of 97% for the last 3 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!
A Different Perspective
We're pleased to report that Baby Bunting Group rewarded shareholders with a total shareholder return of 56% over the last year. That includes the value of the dividend. That gain actually surpasses the 25% TSR it generated (per year) over three years. The improving returns to shareholders suggests the stock is becoming more popular with time. It's always interesting to track share price performance over the longer term. But to understand Baby Bunting Group better, we need to consider many other factors. Even so, be aware that Baby Bunting Group is showing 2 warning signs in our investment analysis , you should know about...
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
This article by Simply Wall St is general in nature. 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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