The total return for Sensient Technologies (NYSE:SXT) investors has risen faster than earnings growth over the last three years
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. Just take a look at Sensient Technologies Corporation (NYSE:SXT), which is up 52%, over three years, soundly beating the market return of 31% (not including dividends).
While this past week has detracted from the company’s three-year return, let’s look at the recent trends of the underlying business and see if the gains have been in alignment.
See our latest analysis for Sensient Technologies
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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).
During three years of share price growth, Sensient Technologies achieved compound earnings per share growth of 20% per year. This EPS growth is higher than the 15% average annual increase in the share price. Therefore, it seems the market has moderated its expectations for growth, somewhat.
The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).
We know that Sensient Technologies 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. 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. We note that for Sensient Technologies the TSR over the last 3 years was 63%, which is better than the share price return mentioned above. And there’s no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
While it’s certainly disappointing to see that Sensient Technologies shares lost 6.4% throughout the year, that wasn’t as bad as the market loss of 10%. Longer term investors wouldn’t be so upset, since they would have made 3%, each year, over five years. It could be that the business is just facing some short term problems, but shareholders should keep a close eye on the fundamentals. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example – Sensient Technologies has 2 warning signs (and 1 which is a bit concerning) we think you should know about.
Of course Sensient Technologies 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 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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