National Grid (LON:NG.) sheds 3.5% this week as annual returns more in line with earnings growth

By buying an index fund, investors can get closer to the average market return. But many of us dare to dream of bigger returns and build a portfolio ourselves. For instance, National Grid plc (LON:NG.) Shareholders have seen the stock price rise 30% over three years, well above the market decline (3.3%, excluding dividends). On the other hand, returns haven’t been as good recently, with shareholders up just 23% including dividends.

In light of the stock’s 3.5% drop over the past week, we want to look at the longer-term story and see if fundamentals have been driving the company’s positive three-year performance. .

See our latest analysis for National Grid

To quote Buffett, “Ships will circumnavigate the globe, but the Flat Earth Society will prosper. There will continue to be wide gaps between price and value in the market…’ By comparing earnings per share (EPS) and share price changes over time, we can get an idea changes in investors’ attitude towards a company over time.

In three years of share price growth, National Grid has achieved compound earnings per share growth of 11% per year. We don’t think it’s entirely a coincidence that EPS growth is reasonably close to the 9% average annual increase in share price. This suggests that sentiment and expectations have not changed drastically. On the contrary, the share price roughly followed EPS growth.

You can see how EPS has changed over time in the image below (click on the graph to see the exact values).

LSE: NG. Earnings per share growth June 12, 2022

We know that National Grid has recently improved its results, but will it increase its revenue? This free report showing analyst revenue forecasts should help you determine whether EPS growth can be sustained.

What about dividends?

It is important to consider the total shareholder return, as well as the stock price return, for a given stock. TSR is a calculation of return that takes into account the value of cash dividends (assuming any dividends received have been reinvested) and the calculated value of all discounted capital raisings and spinoffs. So for companies that pay a generous dividend, the TSR is often much higher than the stock price return. We note that for National Grid the TSR over the last 3 years was 51%, which is better than the share price return mentioned above. This is largely the result of its dividend payments!

A different perspective

We are pleased to report that National Grid shareholders received a 23% year-on-year total shareholder return. Of course, this includes the dividend. As the one-year TSR is better than the five-year TSR (the latter standing at 7% per year), it seems that the stock’s performance has improved lately. Given that the stock price momentum remains strong, it might be worth taking a closer look at the stock lest you miss an opportunity. I find it very interesting to look at stock price over the long term as a proxy for company performance. But to really get insight, we also need to consider other information. Like risks, for example. Every business has them, and we’ve spotted 3 warning signs for National Grid (1 of which can’t be ignored!) that you should know about.

But note: National Grid may not be the best stock to buy. So take a look at this free list of interesting companies with past earnings growth (and new growth forecasts).

Please note that the market returns quoted in this article reflect the market-weighted average returns of the shares currently trading on UK stock exchanges.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Tina G.

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