Investing in Dow (NYSE:DOW) three years ago would have delivered you a 47% gain

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Low-cost index funds make it easy to achieve average market returns. But in any diversified portfolio of stocks, you’ll see some that fall short of the average. That’s what has happened with the Dow Inc. (NYSE:DOW) share price. It’s up 25% over three years, but that is below the market return. In the last year the stock has gained 6.4%.

Now it’s worth having a look at the company’s fundamentals too, because that will help us determine if the long term shareholder return has matched the performance of the underlying business.

Check out our latest analysis for Dow

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 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.

During three years of share price growth, Dow achieved compound earnings per share growth of 50% per year. The average annual share price increase of 8% is actually lower than the EPS growth. So one could reasonably conclude that the market has cooled on the stock. This cautious sentiment is reflected in its (fairly low) P/E ratio of 7.06.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

earnings-per-share-growth

It’s good to see that there was some significant insider buying in the last three months. That’s a positive. That said, we think earnings and revenue growth trends are even more important factors to consider. Dive deeper into the earnings by checking this interactive graph of Dow’s earnings, revenue and cash flow.

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. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of Dow, it has a TSR of 47% for the last 3 years. 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

Pleasingly, Dow’s total shareholder return last year was 11%. That’s including the dividend. The TSR has been even better over three years, coming in at 14% per year. It’s always interesting to track share price performance over the longer term. But to understand Dow better, we need to consider many other factors. Case in point: We’ve spotted 3 warning signs for Dow you should be aware of, and 1 of them is potentially serious.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US 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.