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In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But every investor is virtually certain to have both over-performing and under-performing stocks. So we wouldn't blame long term Redrow plc (LON:RDW) shareholders for doubting their decision to hold, with the stock down 16% over a half decade. Shareholders have had an even rougher run lately, with the share price down 10% in the last 90 days. However, one could argue that the price has been influenced by the general market, which is down 4.9% in the same timeframe.
Given the past week has been tough on shareholders, let's investigate the fundamentals and see what we can learn.
View our latest analysis for Redrow
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 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.
During the unfortunate half decade during which the share price slipped, Redrow actually saw its earnings per share (EPS) improve by 0.7% per year. So it doesn't seem like EPS is a great guide to understanding how the market is valuing the stock. Or possibly, the market was previously very optimistic, so the stock has disappointed, despite improving EPS.
Given that EPS has increased, but the share price has fallen, it's fair to say that market sentiment around the stock has become more negative. Generally speaking, though, if the company can keep growing EPS then the share price will eventually follow.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
It is of course excellent to see how Redrow has grown profits over the years, but the future is more important for shareholders. Take a more thorough look at Redrow's financial health with this free report on its balance sheet.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Redrow, it has a TSR of 9.0% for the last 5 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!