Stock pickers are generally looking for stocks that will outperform the broader market. Buying under-rated businesses is one path to excess returns. To wit, the Discover Financial Services share price has climbed 57% in five years, easily topping the market return of 43% (ignoring dividends).
On the back of a solid 7-day performance, let’s check what role the company’s fundamentals have played in driving long term shareholder returns.
Check out our latest analysis for Discover Financial Services
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. 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.
Over half a decade, Discover Financial Services managed to grow its earnings per share at 22% a year. The EPS growth is more impressive than the yearly share price gain of 9% over the same period. So it seems the market isn’t so enthusiastic about the stock these days. The reasonably low P/E ratio of 6.61 also suggests market apprehension.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
This free interactive report on Discover Financial Services’ earnings, revenue and cash flow is a great place to start, if you want to investigate the stock further.
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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. As it happens, Discover Financial Services’ TSR for the last 5 years was 75%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
While it’s certainly disappointing to see that Discover Financial Services shares lost 6.6% throughout the year, that wasn’t as bad as the market loss of 21%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 12% 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 Discover Financial Services better, we need to consider many other factors. Even so, be aware that Discover Financial Services is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning…
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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