Generally, the goal of active security selection is to find companies that offer returns above the market average. And the truth is, you can make big money if you buy good quality businesses at the right price. Namely, the Australian Foundation Investment share price has climbed 47% in five years, easily outpacing the market yield of 29% (ignoring dividends). In contrast, the most recent gains have not been as impressive, with shareholders earning just 20% including dividends.

Let’s take a look at the underlying fundamentals over the longer term and see if they’ve been consistent with shareholder returns.

Check out our latest review for Australian Foundation Investment

In his essay Graham-and-Doddsville super-investors Warren Buffett described how stock prices don’t always rationally reflect a company’s value. By comparing earnings per share (EPS) and changes in stock prices over time, we can get a sense of how investors’ attitudes towards a company have changed over time.

Australian Foundation Investment’s earnings per share are down 4.3% per year, despite a strong five-year share price performance.

Taking a look at these numbers, we are assuming that the decline in earnings per share is not representative of how the business has changed over the years. Since the change in EPS doesn’t seem to correlate with the change in the stock price, it’s worth taking a look at other metrics.

The decline in income of 1.3% per year is not positive. So it seems that there is a need to take a closer look at earnings and income trends to see how they might influence the stock price.

The graph below illustrates the evolution of earnings and income over time (reveal the exact values ​​by clicking on the image).

We are happy to report that the CEO is paid more modestly than most CEOs of similar capitalization companies. It’s always worth keeping an eye on CEO compensation, but a bigger question is whether the company will increase profits over the years. This free Australian Foundation Investment’s interactive earnings, income and cash flow report is a great place to start if you want to delve deeper into the stock.

What about dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. TSR is a yield calculation that takes into account the value of cash dividends (assuming any dividends received have been reinvested) and the calculated value of any discounted capital increase and spin-off. So, for companies that pay a generous dividend, the TSR is often much higher than the return on the share price. In the case of Australian Foundation Investment, it has a TSR of 78% for the past 5 years. This exceeds its share price return that we mentioned earlier. This is largely the result of his dividend payments!

A different perspective

It is good to see that Australian Foundation Investment has rewarded its shareholders with a total shareholder return of 20% over the past twelve months. And that includes the dividend. This is better than the 12% annualized return over half a decade, which implies that the company has been doing better recently. At the best of times, this can portend real business momentum, meaning that now may be a good time to dig deep. While it is worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Take risks, for example – Australian Foundation Investment has 2 warning signs (and 1 that shouldn’t be ignored) we think you should be aware of.

If you would rather consult with another company – one with potentially superior finances – then don’t miss this free list of companies that have proven that they can increase their profits.

Please note that the market returns quoted in this article reflect the market-weighted average returns of stocks currently trading on AU stock exchanges.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.