General Dynamics' (NYSE:GD) three-year total shareholder returns outpace the underlying earnings growth
General Dynamics Corporation (NYSE:GD) shareholders might be concerned after seeing the share price drop 11% in the last quarter. In contrast the stock has done reasonably well over three years. In fact the stock is up 58%, which is better than the market return of 49%.
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.
Check out our latest analysis for General Dynamics
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. 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 three years of share price growth, General Dynamics achieved compound earnings per share growth of 0.8% per year. This EPS growth is lower than the 17% average annual increase in the share price. This suggests that, as the business progressed over the last few years, it gained the confidence of market participants. It is quite common to see investors become enamoured with a business, after a few years of solid progress.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.
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. As it happens, General Dynamics' TSR for the last 3 years was 71%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
Although it hurts that General Dynamics returned a loss of 2.9% in the last twelve months, the broader market was actually worse, returning a loss of 8.3%. Longer term investors wouldn't be so upset, since they would have made 2%, 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. Even so, be aware that General Dynamics is showing 1 warning sign in our investment analysis , you should know about...
Of course General Dynamics 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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