Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. Active investors aim to buy stocks that vastly outperform the market – but in the process, they risk under-performance. That downside risk was realized by Avangrid, Inc. (NYSE:AGR) shareholders over the last year, as the share price declined 17%. That’s disappointing when you consider the market returned -11%. At least the damage isn’t so bad if you look at the last three years, since the stock is down 2.9% in that time. Unfortunately the last month hasn’t been any better, with the share price down 26%. But this could be related to poor market conditions — stocks are down 22% in the same time.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One way to examine how market sentiment has changed over time is to look at the interaction between a company’s share price and its earnings per share (EPS).
During the unfortunate twelve months during which the Avangrid share price fell, it actually saw its earnings per share (EPS) improve by 18%. Of course, the situation might betray previous over-optimism about growth.
It’s surprising to see the share price fall so much, despite the improved EPS. So it’s easy to justify a look at some other metrics.
We don’t see any weakness in the Avangrid’s dividend so the steady payout can’t really explain the share price drop. From what we can see, revenue is pretty flat, so that doesn’t really explain the share price drop. Of course, it could simply be that it simply fell short of the market consensus expectations.
You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Avangrid, it has a TSR of -14% for the last year. 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
The last twelve months weren’t great for Avangrid shares, which performed worse than the market, costing holders 14% , including dividends . Meanwhile, the broader market slid about 11%, likely weighing on the stock. Investors are up over three years, booking 2.6% per year, much better than the more recent returns. Sometimes when a good quality long term winner has a weak period, it’s turns out to be an opportunity, but you really need to be sure that the quality is there. 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.