If you’re buying a stock and holding it for many years, you’d expect to see a profit. Even better, you’d like to see the share price rise above the market average. Unfortunately for shareholders, Cognizant Technology Solutions Corporation (NASDAQ:CTSH) shares are up 12% over the past five years, which is below the market return. Looking at just the past year, the share price is up 11%.
Given the strong seven-day performance, let’s take a look at how the company’s fundamentals have helped drive long-term shareholder returns.
Read our latest analysis for Cognizant Technology Solutions
While markets are a powerful pricing mechanism, share price reflects investor sentiment as well as underlying business performance. One imperfect but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
During the five years that the share price has grown, Cognizant Technology Solutions has grown its compound earnings per share (EPS) by 3.8% per year. The EPS increase is more impressive than the 2% annual share price increase over the same period. As such, the market seems relatively pessimistic towards the company.
The chart below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
Earnings per Share Growth
Before buying or selling a stock, we always recommend a close look at historic growth trends, which you can find here.
What about dividends?
For any given stock, it is important to consider the total shareholder return, as well as the price return. 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 is fair to say that the TSR gives a more complete picture for dividend paying stocks. In the case of Cognizant Technology Solutions, we can see that the TSR for the past 5 years was 20%, which is higher than the price return shown above. This is mainly due to the dividend payments.
A different perspective
Cognizant Technology Solutions shareholders have gained 13% for the year (even including dividends). However, this return is underperforming the market. The silver lining is that this increase was actually better than the five-year average annual return of 4%. Returns are likely to improve along with the fundamentals of the business. While it’s well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Consider, for example, the ever-present threat of investment risk. We’ve identified 1 warning sign with Cognizant Technology Solutions and understanding them should be part of your investment process.
The story continues
Of course, you might find great investments elsewhere, so take a peek at this free list of companies expected to grow earnings.
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 of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
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