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If you want to compound wealth in the stock market, you can do so by buying an index fund. But the truth is, you can make significant gains if you buy good quality businesses at the right price. For example, the FirstRand Limited (JSE:FSR) share price is 71% higher than it was five years ago, which is more than the market average. Over the last year the stock price is up, albeit only a modest 2.0%.

With that in mind, it’s worth seeing if the company’s underlying fundamentals have been the driver of long term performance, or if there are some discrepancies.

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There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. 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.

Over half a decade, FirstRand managed to grow its earnings per share at 20% a year. The EPS growth is more impressive than the yearly share price gain of 11% over the same period. So it seems the market isn’t so enthusiastic about the stock these days. The reasonably low P/E ratio of 10.72 also suggests market apprehension.

The company’s earnings per share (over time) is depicted in the image below (click to see the exact numbers).

Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.

It is important to consider the total shareholder return, as well as the share price return, for any given stock. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of FirstRand, it has a TSR of 131% for the last 5 years. That exceeds its share price return that we previously mentioned. This is largely a result of its dividend payments!

FirstRand shareholders are up 8.4% for the year (even including dividends). Unfortunately this falls short of the market return. It’s probably a good sign that the company has an even better long term track record, having provided shareholders with an annual TSR of 18% over five years. It’s quite possible the business continues to execute with prowess, even as the share price gains are slowing. It’s always interesting to track share price performance over the longer term. But to understand FirstRand better, we need to consider many other factors. For example, we’ve discovered 1 warning sign for FirstRand that you should be aware of before investing here.

But note: FirstRand may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on South African 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.

It looks like J Sainsbury plc (LON:SBRY) is about to go ex-dividend in the next 3 days. The ex-dividend date is two business days before a company’s record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Therefore, if you purchase J Sainsbury’s shares on or after the 13th of November, you won’t be eligible to receive the dividend, when it is paid on the 19th of December.

The company’s next dividend payment will be UK£0.151 per share, on the back of last year when the company paid a total of UK£0.14 to shareholders. Last year’s total dividend payments show that J Sainsbury has a trailing yield of 3.9% on the current share price of UK£3.492. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it’s growing.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Its dividend payout ratio is 75% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We’d be worried about the risk of a drop in earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 28% of its free cash flow in the past year.

It’s positive to see that J Sainsbury’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

View our latest analysis for J Sainsbury

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. That’s why it’s comforting to see J Sainsbury’s earnings have been skyrocketing, up 26% per annum for the past five years. Earnings per share are growing at a rapid rate, yet the company is paying out more than three-quarters of its earnings.

The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. J Sainsbury’s dividend payments are broadly unchanged compared to where they were 10 years ago.

Has J Sainsbury got what it takes to maintain its dividend payments? J Sainsbury’s growing earnings per share and conservative payout ratios make for a decent combination. We also like that it paid out a lower percentage of its cash flow. There’s a lot to like about J Sainsbury, and we would prioritise taking a closer look at it.

On that note, you’ll want to research what risks J Sainsbury is facing. Every company has risks, and we’ve spotted 1 warning sign for J Sainsbury you should know about.

If you’re in the market for strong dividend payers, we recommend checking 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.