When you buy a stock there is always a possibility that it could drop 100%. But on the bright side, if you buy shares in a high quality company at the right price, you can gain well over 100%. One great example is American Express Company (NYSE:AXP) which saw its share price drive 148% higher over five years. On top of that, the share price is up 19% in about a quarter. The company reported its financial results recently; you can catch up on the latest numbers by reading our company report.
View our latest analysis for American Express
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 flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
During five years of share price growth, American Express actually saw its EPS drop 5.7% per year.
This means it’s unlikely the market is judging the company based on earnings growth. Because earnings per share don’t seem to match up with the share price, we’ll take a look at other metrics instead.
We doubt the modest 1.2% dividend yield is attracting many buyers to the stock. In contrast revenue growth of 3.6% per year is probably viewed as evidence that American Express is growing, a real positive. It’s quite possible that management are prioritizing revenue growth over EPS growth at the moment.
The company’s revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
American Express is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. You can see what analysts are predicting for American Express in this interactive graph of future profit estimates.
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. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for American Express the TSR over the last 5 years was 169%, 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
American Express‘ TSR for the year was broadly in line with the market average, at 39%. Most would be happy with a gain, and it helps that the year’s return is actually better than the average return over five years, which was 22%. It is possible that management foresight will bring growth well into the future, even if the share price slows down. It’s always interesting to track share price performance over the longer term. But to understand American Express better, we need to consider many other factors. To that end, you should learn about the 3 warning signs we’ve spotted with American Express (including 1 which is a bit unpleasant) .
If you would prefer to check out another company — one with potentially superior financials — then do not miss this free list of companies that have proven they can 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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This article by Simply Wall St is general in nature. 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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