NRG Energy, Inc. (NYSE:NRG) shareholders might be concerned after seeing the share price drop 10% in the last quarter. But the silver lining is the stock is up over five years. In that time, it is up 68%, which isn't bad, but is below the market return of 76%.
So let's investigate and see if the longer term performance of the company has been in line with the underlying business' progress.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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 the five years of share price growth, NRG Energy moved from a loss to profitability. That would generally be considered a positive, so we'd expect the share price to be up. Since the company was unprofitable five years ago, but not three years ago, it's worth taking a look at the returns in the last three years, too. Indeed, the NRG Energy share price has gained 15% in three years. Meanwhile, EPS is up 109% per year. This EPS growth is higher than the 5% average annual increase in the share price over the same three years. Therefore, it seems the market has moderated its expectations for growth, somewhat. This cautious sentiment is reflected in its (fairly low) P/E ratio of 2.85.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
We know that NRG Energy has improved its bottom line over the last three years, but what does the future have in store? You can see how its balance sheet has strengthened (or weakened) over time in this free interactive graphic.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of NRG Energy, it has a TSR of 87% 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!
A Different Perspective
While it's certainly disappointing to see that NRG Energy shares lost 4.1% throughout the year, that wasn't as bad as the market loss of 15%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 13% for each year. In the best case scenario the last year is just a temporary blip on the journey to a brighter future. It's always interesting to track share price performance over the longer term. But to understand NRG Energy better, we need to consider many other factors. To that end, you should learn about the 2 warning signs we've spotted with NRG Energy (including 1 which doesn't sit too well with us) .
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
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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