In order to justify the effort of selecting individual stocks, it’s worth striving to beat the returns from a market index fund. But in any portfolio, there are likely to be some stocks that fall short of that benchmark. Unfortunately, that’s been the case for longer term Pennon Group Plc (LON:PNN) shareholders, since the share price is down 50% in the last three years, falling well short of the market decline of around 12%.
Since Pennon Group has shed UK£108m from its value in the past 7 days, let’s see if the longer term decline has been driven by the business’ economics.
Check out our latest analysis for Pennon Group
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.
During the three years that the share price fell, Pennon Group’s earnings per share (EPS) dropped by 25% each year. This fall in EPS isn’t far from the rate of share price decline, which was 21% per year. So it seems like sentiment towards the stock hasn’t changed all that much over time. In this case, it seems that the EPS is guiding the share price.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
We know that Pennon Group has improved its bottom line lately, but is it going to grow revenue? You could check out this free report showing analyst revenue forecasts.
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 is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Pennon Group, it has a TSR of -20% for the last 3 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
We regret to report that Pennon Group shareholders are down 14% for the year (even including dividends). Unfortunately, that’s worse than the broader market decline of 1.7%. Having said that, it’s inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Longer term investors wouldn’t be so upset, since they would have made 10%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. It’s always interesting to track share price performance over the longer term. But to understand Pennon Group better, we need to consider many other factors. Consider risks, for instance. Every company has them, and we’ve spotted 2 warning signs for Pennon Group you should know about.
Of course Pennon Group may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB exchanges.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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