Those who invested in Tesco (LON:TSCO) three years ago are up 119%

By buying an index fund, you can roughly match the market return with ease. But if you pick the right individual stocks, you could make more than that. For example, Tesco PLC (LON:TSCO) shareholders have seen the share price rise 95% over three years, well in excess of the market return (27%, not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 24% 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.

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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.

Tesco was able to grow its EPS at 25% per year over three years, sending the share price higher. This EPS growth is remarkably close to the 25% average annual increase in the share price. This observation indicates that the market's attitude to the business hasn't changed all that much. Au contraire, the share price change has arguably mimicked the EPS growth.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. It might be well worthwhile taking a look at our free report on Tesco's earnings, revenue and cash flow.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share 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's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Tesco the TSR over the last 3 years was 119%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

Tesco shareholders have received returns of 24% over twelve months (even including dividends), which isn't far from the general market return. Most would be happy with a gain, and it helps that the year's return is actually better than the average return over five years, which was 18%. Even if the share price growth slows down from here, there's a good chance that this is business worth watching in the long term. It's always interesting to track share price performance over the longer term. But to understand Tesco better, we need to consider many other factors. For example, we've discovered 1 warning sign for Tesco that you should be aware of before investing here.

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of undervalued small cap companies that insiders are buying.

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

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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.