Investors in Fairfax Financial Holdings (TSE:FFH) have made a favorable return of 42% over the past three years
One simple way to benefit from the stock market is to buy an index fund. But if you buy good businesses at attractive prices, your portfolio returns could exceed the average market return. For example, Fairfax Financial Holdings Limited (TSE:FFH) shareholders have seen the share price rise 36% over three years, well in excess of the market return (20%, not including dividends). On the other hand, the returns haven't been quite so good recently, with shareholders up just 31% , including dividends .
So let's investigate and see if the longer term performance of the company has been in line with the underlying business' progress.
View our latest analysis for Fairfax Financial Holdings
While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.
Over the last three years, Fairfax Financial Holdings failed to grow earnings per share, which fell 58% (annualized).
Thus, it seems unlikely that the market is focussed on EPS growth at the moment. Given this situation, it makes sense to look at other metrics too.
Languishing at just 1.6%, we doubt the dividend is doing much to prop up the share price. It may well be that Fairfax Financial Holdings revenue growth rate of 12% over three years has convinced shareholders to believe in a brighter future. In that case, the company may be sacrificing current earnings per share to drive growth, and maybe shareholder's faith in better days ahead will be rewarded.
The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).
It's good to see that there was some significant insider buying in the last three months. That's a positive. On the other hand, we think the revenue and earnings trends are much more meaningful measures of the business. This free report showing analyst forecasts should help you form a view on Fairfax Financial Holdings
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of Fairfax Financial Holdings, it has a TSR of 42% for the last 3 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
We're pleased to report that Fairfax Financial Holdings shareholders have received a total shareholder return of 31% over one year. Of course, that includes the dividend. That's better than the annualised return of 6% over half a decade, implying that the company is doing better recently. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. It's always interesting to track share price performance over the longer term. But to understand Fairfax Financial Holdings better, we need to consider many other factors. To that end, you should learn about the 4 warning signs we've spotted with Fairfax Financial Holdings (including 1 which can't be ignored) .
Fairfax Financial Holdings 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.
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