For many, the main point of investing in the stock market is to achieve spectacular returns. While the best companies are hard to find, but they can generate massive returns over long periods. Don't believe it? Then look at the PennyMac Financial Services, Inc. (NYSE:PFSI) share price. It's 320% higher than it was five years ago. And this is just one example of the epic gains achieved by some long term investors. Also pleasing for shareholders was the 12% gain in the last three months.
Now it's worth having a look at the company's fundamentals too, because that will help us determine if the long term shareholder return has matched the performance of the underlying business.
To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...' 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 five years of share price growth, PennyMac Financial Services achieved compound earnings per share (EPS) growth of 54% per year. This EPS growth is higher than the 33% average annual increase in the share price. So it seems the market isn't so enthusiastic about the stock these days. This cautious sentiment is reflected in its (fairly low) P/E ratio of 3.22.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
We know that PennyMac Financial Services has improved its bottom line over the last three years, but what does the future have in store? Take a more thorough look at PennyMac Financial Services' financial health with this free report on its balance sheet.
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of PennyMac Financial Services, it has a TSR of 341% for the last 5 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
PennyMac Financial Services shareholders gained a total return of 8.5% during the year. Unfortunately this falls short of the market return. It's probably a good sign that the company has an even better long term track record, having provided shareholders with an annual TSR of 35% over five years. It's quite possible the business continues to execute with prowess, even as the share price gains are slowing. 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. To that end, you should be aware of the 1 warning sign we've spotted with PennyMac Financial Services .
We will like PennyMac Financial Services better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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