When you buy a stock, there is always a chance that it will drop by 100%. But on the bright side, you can earn well over 100% with a really good stock. For example, the price of American States Water Company The stock (NYSE: AWR) has risen 118% in the past five years.

Now, it’s worth looking at the fundamentals of the business as well, as this will help us determine whether the long-term return to shareholders matches the performance of the underlying business.

To paraphrase Benjamin Graham: In the short term the market is a voting machine, but in the long term it is a weighing machine. An imperfect but reasonable way to gauge how sentiment is changing around a company is to compare earnings per share (EPS) with the stock price.

In five years, American States Water has managed to increase its earnings per share by 9.2% per year. This EPS growth is lower than the average annual increase of 17% in the share price. This suggests that market participants hold society in the highest regard these days. And that’s hardly shocking given the growth history.

You can see how EPS has changed over time in the image below (click on the graph to see the exact values).

NYSE: AWR Growth in earnings per share September 21, 2021

Before buying or selling a stock, we always recommend a careful review of historical growth trends, available here.

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 discounted demerger or capital increase, as well as any dividend, based on the assumption that dividends are reinvested. It’s fair to say that the TSR gives a more complete picture of dividend paying stocks. Note that for American States Water, the TSR over the past 5 years was 138%, which is better than the share price return mentioned above. The dividends paid by the company thus boosted the total shareholder return.

A different perspective

American States Water shareholders are up 21% for the year (including dividends). But it was below the market average. On the bright side, it’s still a payoff, and it’s actually better than the 19% average return over half a decade. It is possible that returns will improve with company fundamentals. It is always interesting to follow the evolution of stock prices over the long term. But to better understand the water in American states, there are many other factors that we need to consider. To this end, you should inquire about the 2 warning signs we spotted with American States Water (including 1 which makes us a little uncomfortable).

If you are like me then you not want to miss it free list of growing companies that insiders buy.

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

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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