While Merck & Co., Inc. (NYSE:MRK) shareholders are probably generally happy, the stock hasn’t had particularly good run recently, with the share price falling 11% in the last quarter. But that shouldn’t obscure the pleasing returns achieved by shareholders over the last three years. After all, the share price is up a market-beating 49% in that time.
So let’s investigate and see if the longer term performance of the company has been in line with the underlying business’ progress.
See our latest analysis for Merck
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.
Merck was able to grow its EPS at 55% per year over three years, sending the share price higher. This EPS growth is higher than the 14% average annual increase in the share price. So one could reasonably conclude that the market has cooled on the stock.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
It is of course excellent to see how Merck has grown profits over the years, but the future is more important for shareholders. Take a more thorough look at Merck’s financial health with this free report on its balance sheet.
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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Merck the TSR over the last 3 years was 63%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
Merck provided a TSR of 9.5% over the last twelve months. But that return falls short of the market. On the bright side, the longer term returns (running at about 10% a year, over half a decade) look better. Maybe the share price is just taking a breather while the business executes on its growth strategy. 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. Take risks, for example – Merck has 1 warning sign we think you should be aware of.
But note: Merck may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American 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.