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, the Kinder Morgan, Inc. (NYSE:KMI) share price is up 71% in the last three years, clearly besting the market return of around 17% (not including dividends). However, more recent returns haven’t been as impressive as that, with the stock returning just 62% in the last year, including dividends.
Let’s take a look at the underlying fundamentals over the longer term, and see if they’ve been consistent with shareholders returns.
See our latest analysis for Kinder Morgan
To quote Buffett, ‘Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace…’ 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.
Kinder Morgan was able to grow its EPS at 14% per year over three years, sending the share price higher. This EPS growth is lower than the 20% average annual increase in the share price. This indicates that the market is feeling more optimistic on the stock, after the last few years of progress. It’s not unusual to see the market ‘re-rate’ a stock, after a few years of growth.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
We consider it positive that insiders have made significant purchases in the last year. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
It is important to consider the total shareholder return, as well as the share price return, for any given stock. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. It’s fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Kinder Morgan the TSR over the last 3 years was 105%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
We’re pleased to report that Kinder Morgan shareholders have received a total shareholder return of 62% over one year. Of course, that includes the dividend. That gain is better than the annual TSR over five years, which is 12%. Therefore it seems like sentiment around the company has been positive lately. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. 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. For example, we’ve discovered 3 warning signs for Kinder Morgan (2 are a bit unpleasant!) that you should be aware of before investing here.
