Analog Devices' (NASDAQ:ADI) five-year earnings growth trails the strong shareholder returns

When we invest, we're generally looking for stocks that outperform the market average. And the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, long term Analog Devices, Inc. (NASDAQ:ADI) shareholders have enjoyed a 83% share price rise over the last half decade, well in excess of the market return of around 46% (not including dividends).

On the back of a solid 7-day performance, let's check what role the company's fundamentals have played in driving long term shareholder returns.

Check out our latest analysis for Analog Devices

While the efficient markets hypothesis continues to be taught by some, it has been proven that markets are over-reactive dynamic systems, and investors are not always rational. 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.

Over half a decade, Analog Devices managed to grow its earnings per share at 13% a year. This EPS growth is remarkably close to the 13% average annual increase in the share price. That suggests that the market sentiment around the company hasn't changed much over that time. Indeed, it would appear the share price is reacting to the EPS.

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

It might be well worthwhile taking a look at our free report on Analog Devices' 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. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. We note that for Analog Devices the TSR over the last 5 years was 102%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!

A Different Perspective

While it's never nice to take a loss, Analog Devices shareholders can take comfort that , including dividends,their trailing twelve month loss of 10% wasn't as bad as the market loss of around 20%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 15% for each year. In the best case scenario the last year is just a temporary blip on the journey to a brighter future. It's always interesting to track share price performance over the longer term. But to understand Analog Devices better, we need to consider many other factors. Even so, be aware that Analog Devices is showing 3 warning signs in our investment analysis , you should know about...

We will like Analog Devices better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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