Generally speaking the aim of active stock picking is to find companies that provide returns that are superior to the market average. And while active stock picking involves risks (and requires diversification) it can also provide excess returns. For example, long term The Toronto-Dominion Bank (TSE:TD) shareholders have enjoyed a 41% share price rise over the last half decade, well in excess of the market return of around 28% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 33% in the last year , including dividends .
Since the long term performance has been good but there's been a recent pullback of 5.3%, let's check if the fundamentals match the share price.
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. 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.
Over half a decade, Toronto-Dominion Bank managed to grow its earnings per share at 14% a year. The EPS growth is more impressive than the yearly share price gain of 7% 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 10.66 also suggests market apprehension.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
We consider it positive that insiders have made significant purchases in the last year. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. Before buying or selling a stock, we always recommend a close examination of historic 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 incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Toronto-Dominion Bank the TSR over the last 5 years was 72%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
We're pleased to report that Toronto-Dominion Bank shareholders have received a total shareholder return of 33% over one year. That's including the dividend. That's better than the annualised return of 11% over half a decade, implying that the company is doing better recently. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. It's always interesting to track share price performance over the longer term. But to understand Toronto-Dominion Bank better, we need to consider many other factors. For example, we've discovered 2 warning signs for Toronto-Dominion Bank (1 is significant!) that you should be aware of before investing here.
Toronto-Dominion Bank is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on CA 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.