The main point of investing for the long term is to make money. Furthermore, you'd generally like to see the share price rise faster than the market. But Northrop Grumman Corporation (NYSE:NOC) has fallen short of that second goal, with a share price rise of 72% over five years, which is below the market return. The last year hasn't been great either, with the stock up just 2.9%.
Let's take a look at the underlying fundamentals over the longer term, and see if they've been consistent with shareholders returns.
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...' 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 five years of share price growth, Northrop Grumman actually saw its EPS drop 5.9% per year.
This means it's unlikely the market is judging the company based on earnings growth. Since the change in EPS doesn't seem to correlate with the change in share price, it's worth taking a look at other metrics.
We doubt the modest 1.6% dividend yield is attracting many buyers to the stock. On the other hand, Northrop Grumman's revenue is growing nicely, at a compound rate of 3.6% over the last five years. In that case, the company may be sacrificing current earnings per share to drive growth.
The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
Northrop Grumman is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. So we recommend checking out this free report showing consensus forecasts
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. 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 Northrop Grumman, it has a TSR of 87% 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
Northrop Grumman provided a TSR of 4.7% over the last twelve months. Unfortunately this falls short of the market return. If we look back over five years, the returns are even better, coming in at 13% per year for five years. It may well be that this is a business worth popping on the watching, given the continuing positive reception, over time, from the market. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Northrop Grumman , and understanding them should be part of your investment process.
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 American 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.