Magellan Financial Group (ASX:MFG) sheds AU$146m, company earnings and investor returns have been trending downwards for past five years
Long term investing is the way to go, but that doesn’t mean you should hold every stock forever. We don’t wish catastrophic capital loss on anyone. For example, we sympathize with anyone who was caught holding Magellan Financial Group Limited (ASX:MFG) during the five years that saw its share price drop a whopping 81%. The falls have accelerated recently, with the share price down 10% in the last three months. We really hope anyone holding through that price crash has a diversified portfolio. Even when you lose money, you don’t have to lose the lesson.
After losing 8.8% 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. 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 the five years over which the share price declined, Magellan Financial Group’s earnings per share (EPS) dropped by 15% each year. Readers should note that the share price has fallen faster than the EPS, at a rate of 28% per year, over the period. This implies that the market was previously too optimistic about the stock. The less favorable sentiment is reflected in its current P/E ratio of 9.21.
The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).
Dive deeper into Magellan Financial Group’s key metrics by checking this interactive graph of Magellan Financial Group’s earnings, revenue and cash flow.
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). 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. As it happens, Magellan Financial Group’s TSR for the last 5 years was -71%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!
Investors in Magellan Financial Group had a tough year, with a total loss of 10% (including dividends), against a market gain of about 9.6%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. However, the loss over the last year isn’t as bad as the 11% per annum loss investors have suffered over the last half decade. We’d need to see some sustained improvements in the key metrics before we could muster much enthusiasm. It’s always interesting to track share price performance over the longer term. But to understand Magellan Financial Group better, we need to consider many other factors. For instance, we’ve identified 2 warning signs for Magellan Financial Group (1 can’t be ignored) that you should be aware of.
