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Passive investing in index funds can generate returns that roughly match the overall market. But if you pick the right individual stocks, you could make more than that. To wit, the Toll Brothers, Inc. (NYSE:TOL) share price is 28% higher than it was a year ago, much better than the market return of around 21% (not including dividends) in the same period. That's a solid performance by our standards! However, the stock hasn't done so well in the longer term, with the stock only up 18% in three years.
See our latest analysis for Toll Brothers
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 imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.
Over the last twelve months, Toll Brothers actually shrank its EPS by 31%.
This means it's unlikely the market is judging the company based on earnings growth. Indeed, when EPS is declining but the share price is up, it often means the market is considering other factors.
We are skeptical of the suggestion that the 1.0% dividend yield would entice buyers to the stock. Unfortunately Toll Brothers' fell 5.7% over twelve months. So the fundamental metrics don't provide an obvious explanation for the share price gain.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
Toll Brothers is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. If you are thinking of buying or selling Toll Brothers stock, you should check out this free report showing analyst consensus estimates for future profits.
What about the Total Shareholder Return (TSR)?
Investors should note that there's a difference between Toll Brothers' total shareholder return (TSR) and its share price change, which we've covered above. 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. Its history of dividend payouts mean that Toll Brothers' TSR of 30% over the last year is better than the share price return.
A Different Perspective
It's good to see that Toll Brothers has rewarded shareholders with a total shareholder return of 30% in the last twelve months. And that does include the dividend. That's better than the annualised return of 4.9% over half a decade, implying that the company is doing better recently. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. 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 - Toll Brothers has 3 warning signs (and 1 which is potentially serious) we think you should know about.