Billionaire investor Warren Buffett is fond of quoting Mark Twain’s quip: “history doesn’t repeat itself, but it does rhyme.”
This quote embodies an important concept to comprehend when investing – the past performance of a company should not be unquestioningly extrapolated into the future, however past performance can be a useful guide to what the future may hold for a company.
The following five companies have all recorded outstanding total shareholder returns (TSR) – a measure of share price performance plus dividends – of over 20% per annum (pa) for the past three years.
Leading our list is Ramsay Health Care Limited (ASX: RHC) which has provided a TSR of 40% pa. These gains have been helped along by a significant multiple expansion which has seen the price-to-earnings ratio increase from around 18 times to over 30 times earnings.
It’s often said that investors should ‘follow the smart money’. It would have been good advice over the past three years in the case of billionaire Mr James Packer. The Packer-controlled Crown Resorts Ltd (ASX: CWN) has produced a TSR of 32.5%.
Pleasingly for the one-million plus shareholders in Telstra Corporation Ltd (ASX: TLS) the stock is also high on the list of blue-chip stocks that have provided impressive TSR. The telco has averaged gains of 29.8% each year for the past three years.
CSL Limited (ASX: CSL) is almost without question one of Australia’s best companies. The company continues to spend heavily on research and development which in turn has allowed the group to successfully grow its revenue base. Shareholders have enjoyed a TSR of 28.3% over the past three years.
Like a number of its large, financial sector peers Suncorp Group Ltd (ASX: SUN) has been a great performer with the banking and insurance group leading many in its peer group and achieving a TSR of 21.1%.
While past performance in terms of TSR certainly doesn’t guarantee that future returns will be similar, it can be a good starting point for seeking out high quality businesses. The proviso being that it is also a place where overvaluation is likely to be lurking due to investors bidding a premium for high quality stocks.
For this reason checking that the TSR growth is justified based on earnings growth and not simply a more rosy valuation (for example multiple expansion) is important as this could certainly hinder future gains in TSR.