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Passive investing in index funds can generate returns that roughly match the overall market. But you can significantly boost your returns by picking above-average stocks. To wit, the British American Tobacco p.l.c. (LON:BATS) share price is 36% higher than it was a year ago, much better than the market return of around 1.5% (not including dividends) in the same period. That's a solid performance by our standards! Unfortunately the longer term returns are not so good, with the stock falling 3.3% in the last three years.
So let's assess the underlying fundamentals over the last 1 year and see if they've moved in lock-step with shareholder returns.
Our free stock report includes 4 warning signs investors should be aware of before investing in British American Tobacco. Read for free now.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
During the last year British American Tobacco grew its earnings per share, moving from a loss to a profit.
The result looks like a strong improvement to us, so we're not surprised the market likes the growth. Generally speaking the profitability inflection point is a great time to research a company closely, lest you miss an opportunity to profit.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
We know that British American Tobacco has improved its bottom line lately, but is it going to grow revenue? If you're interested, you could check this free report showing consensus revenue forecasts.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for British American Tobacco the TSR over the last 1 year was 48%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
It's nice to see that British American Tobacco shareholders have received a total shareholder return of 48% over the last year. And that does include the dividend. That gain is better than the annual TSR over five years, which is 10%. Therefore it seems like sentiment around the company has been positive lately. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with British American Tobacco , and understanding them should be part of your investment process.