A stock’s annual total return potential is the sum of its appreciation during a specified time span and the cash dividends paid during that span, all divided by the stock price at the start of the period. It gives investors an all-in look (capital gains plus dividends) at a stock’s performance in a given period.
Investors can get a sense of a stock’s expected future performance by looking at the annual total return projections in the 2014-16 Projections box at the upper left hand side of the Value Line Ratings & Reports page. Future total return potential in the box is expressed as a range, reflecting analyst projections of the issue’s upper and lower price growth potential, with dividends factored in.
Dividends can sweeten total returns. For example, the shares of factory automation software provider Brooks Automation (BRKS) and property/casualty insurer Allstate (ALL) were both projected to appreciate by 115%-30% between late 2010/early 2011 and the mid-decade time frame. Brooks doesn’t pay a dividend, and had a 3- to 5-year annualized total return potential in the 21%-7% range. But Allstate pays an $0.80-a-share annual dividend, giving the stock a 2.6% yield and a slightly more attractive annualized total return potential of 23%-10%.
To be sure, some stocks that don’t pay dividends can score well for total return potential, like the shares of computer-maker Dell (DELL), which in early 2011, were trading well below the high of nearly $60 a share that the issue reached in 2000, during the last tech boom. And stocks with generous dividend yields can have low total return possibilities if the issue’s 3- to 5-year appreciation potential is minimal, as is true for many electric utility stocks; Hawaiian Electric (HE), which had a dividend yield of 5.0% in early 2011, but price appreciation potential of +20%/-25% to the mid-decade time frame is a good example. Investors focusing on income in the near term may prefer dividend-paying stocks, regardless of their total return potential. Note also that the riskiness of a particular stock may be as important to an investor as its total return potential.
Meanwhile, for a look back at an equity’s historical total return performance, take a glance on the right side of the page, at the % Total Return percentages just above the statistical array. The first column gives investors a sense of the stock’s total returns over the past year, past three years, and past five years. The second column lists the total return performance for the Value Line Arithmetic Composite, an equally weighted price index for all of the stocks covered in The Value Line Investment Survey, for the same three periods. Comparing returns in the two columns gives a sense of how a stock stacked up in the past against all stocks under Value Line review.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.