The main aim of stock picking is to find the market-beating stocks.  But the main game is to find enough winners to more than offset the losers  So we wouldn't blame long term Cisco Systems, Inc. (NASDAQ:CSCO) shareholders for doubting their decision to hold, with the stock down 18% over a half decade.    

So let's have a look and see if the longer term performance of the company has been in line with the underlying business' progress.  

To quote Buffett, 'Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace...'  One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).

While the share price declined over five years, Cisco Systems actually managed to increase EPS by an average of 0.6% per year.  Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain).  Alternatively, growth expectations may have been unreasonable in the past.

Given that EPS has increased, but the share price has fallen, it's fair to say that market sentiment around the stock has become more negative.  Having said that, if the EPS gains continue we'd expect the share price to improve, longer term.

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

NasdaqGS:CSCO Earnings Per Share Growth July 4th 2024

Dive deeper into Cisco Systems' key metrics by checking this interactive graph of Cisco Systems'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 incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested.  It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend.  In the case of Cisco Systems, it has a TSR of -4.5% for the last 5 years. That exceeds its share price return that we previously mentioned.  The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

Investors in Cisco Systems had a tough year, with a total loss of 6.4% (including dividends), against a market gain of about 25%.  However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period.     Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 0.9% per year over five years.  Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround.        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.   To that end, you should be aware of the   1 warning sign we've spotted with Cisco Systems .  

We will like Cisco Systems better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) 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 American exchanges.