Sage Group’s (LON:SGE) earnings growth rate lags the 13% CAGR delivered to shareholders
Stock pickers are generally looking for stocks that will outperform the broader market. Buying under-rated businesses is one path to excess returns. To wit, the Sage Group share price has climbed 63% in five years, easily topping the market return of 37% (ignoring dividends). On the other hand, the more recent gains haven’t been so impressive, with shareholders gaining just 7.5%, including dividends.
In light of the stock dropping 4.2% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company’s positive five-year return.
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).
Over half a decade, Sage Group managed to grow its earnings per share at 3.5% a year. This EPS growth is lower than the 10% average annual increase in the share price. So it’s fair to assume the market has a higher opinion of the business than it did five years ago. And that’s hardly shocking given the track record of growth.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
We know that Sage 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.
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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Sage Group the TSR over the last 5 years was 82%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
Sage Group shareholders are up 7.5% for the year (even including dividends). But that was short of the market average. If we look back over five years, the returns are even better, coming in at 13% per year for five years. It’s quite possible the business continues to execute with prowess, even as the share price gains are slowing. It’s always interesting to track share price performance over the longer term. But to understand Sage Group better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We’ve identified 1 warning sign with Sage Group , and understanding them should be part of your investment process.
