When you buy and hold a stock for the long term, you definitely want it to provide a positive return. Better yet, you would like to see the share price rise more than the market average. Unfortunately for shareholders, although the The Coca-Cola Company (NYSE:KO) stock price has risen 20% over the past five years, which is lower than the market return. Last year wasn’t great either, with shares rising just 1.4%.
So let’s investigate and see if the company’s long-term performance is in line with the progress of the underlying business.
See our latest Coca-Cola analysis
To quote Buffett: “Ships will sail around the world, but the Flat Earth Society will flourish. There will continue to be large discrepancies between price and value in the market…’ By comparing earnings per share (EPS) and share price changes over time, we can get an idea of how investor attitudes towards a company have transformed over time.
During five years of share price growth, Coca-Cola achieved compound earnings per share (EPS) growth of 9.6% per year. This EPS growth is higher than the 4% average annual increase in share price. Therefore, it can be concluded that the broader market has become more cautious towards stocks.
The image below shows how EPS has tracked over time (if you click on the image you can see more details).
Before buying or selling a share, we always recommend a thorough examination Historical growth trends, available here.
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 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. We note that for Coca-Cola the TSR over the last 5 years was 41%, which is better than the share price return mentioned above. This is largely a result of dividend payments!
A different perspective
Coca-Cola shareholders earned a total return of 4.7% during the year. But this fell short of the market average. It’s probably a good sign that the company has an even better long-term track record, having provided shareholders with an annual TSR of 7% over five years. It may well be that this is a business worth watching, given the market’s continued positive reception over time. I find it very interesting to look at share price over the long term as an indicator of business performance. But to truly gain insights, we need to consider other information as well. Consider, for example, the ever-present specter of investment risk. We’ve identified 1 warning sign with Coca-Cola and understanding them should be part of your investment process.
Clear Coca-Cola May Not Be the Best Stock to Buy. So you might want to see this free collection of growth stocks.
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 Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your objectives or financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.
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