Some stocks are best avoided. We really hate to see fellow investors lose their hard-earned money. Anyone who held Provident Financial plc (LON:PFG) for five years would be nursing their metaphorical wounds since the share price dropped 91% in that time. And we doubt long term believers are the only worried holders, since the stock price has declined 32% over the last twelve months. The falls have accelerated recently, with the share price down 25% in the last three months. This could be related to the recent financial results – you can catch up on the most recent data by reading our company report. We really feel for shareholders in this scenario. It’s a good reminder of the importance of diversification, and it’s worth keeping in mind there’s more to life than money, anyway.
After losing 11% this past week, it’s worth investigating the company’s fundamentals to see what we can infer from past performance.
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. 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 the five years over which the share price declined, Provident Financial’s earnings per share (EPS) dropped by 22% each year. Readers should note that the share price has fallen faster than the EPS, at a rate of 38% per year, over the period. So it seems the market was too confident about the business, in the past. The less favorable sentiment is reflected in its current P/E ratio of 4.69.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
We know that Provident Financial has improved its bottom line lately, but is it going to grow revenue? This free report showing analyst revenue forecasts should help you figure out if the EPS growth can be sustained.
What About Dividends?
It is important to consider the total shareholder return, as well as the share price return, for any given stock. 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. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Provident Financial’s TSR for the last 5 years was -86%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
A Different Perspective
We regret to report that Provident Financial shareholders are down 29% for the year (even including dividends). Unfortunately, that’s worse than the broader market decline of 2.0%. Having said that, it’s inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Unfortunately, longer term shareholders are suffering worse, given the loss of 13% doled out over the last five years. We’d need to see some sustained improvements in the key metrics before we could muster much enthusiasm. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We’ve identified 2 warning signs with Provident Financial (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.
Of course Provident Financial may not be the best stock to buy. So you may wish 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 GB 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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