Buying a low-cost index fund will get you the average market return. But if you invest in individual stocks, some are likely to underperform. That's what has happened with the Cathay General Bancorp (NASDAQ:CATY) share price. It's up 12% over three years, but that is below the market return. Zooming in, the stock is actually down 8.9% in the last year.
In light of the stock dropping 5.0% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive three-year return.
Check out our latest analysis for Cathay General Bancorp
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 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.
Cathay General Bancorp was able to grow its EPS at 7.3% per year over three years, sending the share price higher. The average annual share price increase of 4% is actually lower than the EPS growth. So one could reasonably conclude that the market has cooled on the stock. We'd venture the lowish P/E ratio of 9.19 also reflects the negative sentiment around the stock.
The company's earnings per share (over time) is depicted in the image below (click to see the exact numbers).
It's probably worth noting that the CEO is paid less than the median at similar sized companies. But while CEO remuneration is always worth checking, the really important question is whether the company can grow earnings going forward. It might be well worthwhile taking a look at our free report on Cathay General Bancorp's 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. 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. We note that for Cathay General Bancorp the TSR over the last 3 years was 24%, which is better than the share price return mentioned above. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
Although it hurts that Cathay General Bancorp returned a loss of 6.0% in the last twelve months, the broader market was actually worse, returning a loss of 22%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 2% for each year. In the best case scenario the last year is just a temporary blip on the journey to a brighter future. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example - Cathay General Bancorp has 1 warning sign we think you should be aware of.
If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can 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 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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