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Ferrari (NYSE:RACE) shareholders have earned a 15% CAGR over the last five years

When we invest, we're generally looking for stocks that outperform the market average. Buying under-rated businesses is one path to excess returns. For example, long term Ferrari N.V. (NYSE:RACE) shareholders have enjoyed a 94% share price rise over the last half decade, well in excess of the market return of around 70% (not including dividends). So let's investigate and see if the longer term performance of the company has been in line with the underlying business' progress. In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time. During five years of share price growth, Ferrari achieved compound earnings per share (EPS) growth of 14% per year. That makes the EPS growth particularly close to the yearly share price growth of 14%. Therefore one could conclude that sentiment towards the shares hasn't morphed very much. Rather, the share price has approximately tracked EPS growth. You can see how EPS has changed over time in the image below (click on the chart to see the exact values). We're pleased to report that the CEO is remunerated more modestly than most CEOs at similarly capitalized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.. 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. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Ferrari's TSR for the last 5 years was 100%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence! A Different Perspective While it's certainly disappointing to see that Ferrari shares lost 3.8% throughout the year, that wasn't as bad as the market loss of 8.9%. Longer term investors wouldn't be so upset, since they would have made 15%, each year, over five years. It could be that the business is just facing some short term problems, but shareholders should keep a close eye on the fundamentals. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Even so, be aware that Ferrari is showing 1 warning sign in our investment analysis , you should know about... For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket. 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. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. The board of Stanley Black & Decker, Inc. (NYSE:SWK) has announced that it will be paying its dividend of $0.80 on the 20th of September, an increased payment from last year's comparable dividend. This will take the dividend yield to an attractive 3.3%, providing a nice boost to shareholder returns. Stanley Black & Decker's Payment Has Solid Earnings Coverage If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, Stanley Black & Decker was earning enough to cover the dividend, but it wasn't generating any free cash flows. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend. Over the next year, EPS is forecast to expand by 94.9%. If the dividend continues on this path, the payout ratio could be 27% by next year, which we think can be pretty sustainable going forward. Stanley Black & Decker Has A Solid Track Record The company has a sustained record of paying dividends with very little fluctuation. Since 2012, the annual payment back then was $1.64, compared to the most recent full-year payment of $3.20. This works out to be a compound annual growth rate (CAGR) of approximately 6.9% a year over that time. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained. The Dividend's Growth Prospects Are Limited Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Let's not jump to conclusions as things might not be as good as they appear on the surface. Stanley Black & Decker has seen earnings per share falling at 4.3% per year over the last five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited. In Summary Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While Stanley Black & Decker is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment. Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 4 warning signs for Stanley Black & Decker (of which 1 is potentially serious!) you should know about. Is Stanley Black & Decker not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks. 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. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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