How Fundamental Factors Affect Equity Total Returns

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Equity return drivers

While there could be thousands of variables that could influence a stock’s price, I believe that long-term returns can be attributed to fundamental drivers and multiple expansion/contraction. Fundamental drivers include earnings growth and the distribution of capital to shareholders, which may take the form of dividends or redemptions. The multiple expansion potentially represents a significant amount of information which may include idiosyncratic performances as well as the systematic environment.

Examples of idiosyncratic performance for a business may include:

  • Profit growth
  • Operating leverage
  • Return on invested capital
  • business ditch
  • Competitive advantages

Examples of the systematic environment affecting a business may include:

  • Interest rate
  • Inflation
  • Change rate
  • Tax rates
  • Geopolitical events

Because I believe that fundamentals are associated with the information potentially contained in a company’s multiple stock prices over several years, I wanted to research these driving forces applied to individual stocks. For this study, I analyzed the Big Tech group:

As well as other mega-caps in different sectors, including:

  • Berkshire Hathaway (BRK.A)
  • UnitedHealth Group (UNH)
  • Exxon Mobil (XOM)
  • Home Depot
  • Visa (V)
  • Costco (COST)

How I conducted the study

To calculate the yield mixes for each company: I recorded the total net income for the starting year and the most previous full fiscal year; the price, the number of diluted shares and the LTM P/E multiple at the end of the starting year and at the end of the most recent financial year; and the total amount of dividend payments (per share) received during the period.

I recorded the compound annual growth rates [CAGR] for net income growth, P/E expansion (contraction), change in number of shares (took the inverse of the repurchase effect) and took the total dividends received and divided by the most recently recorded share price. After adding all of these together, I came up with my total return composition.

Since the composition of total return varied slightly from total price return, I took the weights of each contributing factor (earnings growth, P/E expansion (contraction), dividend and redemption effect) and I multiplied by the CAGR of the total stock return:

Composition of the return MSFT

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Study results

Total Return Compounds

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AAPL Return Contributions

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Reimbursement of MSFT contributions

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GOOGL Refund of Contributions

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AMZN Dues Refund

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FB Return Contributions

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BRK.A Refund of contributions

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UNH Return Contributions

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XOM return dues

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HD Return Contributions

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V Refund of contributions

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COST return contributions

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Study the imperfections

While I believe the study gives an accurate representation of total equity return contributions for the companies featured above, the study is not perfect for the reasons below:

  • Return contributors (earnings, P/E expansion, dividend effect, redemption effect) did not add up perfectly to the actual total stock price return over the same period. For most companies, the difference was less than 250 basis points, but for less developed companies like Amazon, earnings growth over this period was extraordinarily high relative to total stock returns. This is mainly due to the fact that net income margins increased dramatically over the measured period (2016, 1.74% – 2021, 7.10%).
  • The period covered by the study seemed to me insufficient to give a more global vision of drivers over a long period through different economic cycles.
  • For Exxon in particular, the dividend effect was around 40% on the average price over the period studied. The chart above shows that the effect of the Exxon dividend contributed -4.08% to the return, as the total stock return was negative. These are miscalculations because buying back about 40% of the market cap is a benefit to me, but the weighted contribution makes it appear negative.


I believe that over the long term (20+ years), earnings growth and returns on invested capital will be closest to total equity returns. Still seeing the effects of earnings, buybacks, dividends and multiple expansion (contraction) on the specific group of stocks over the past 9 years has been very revealing. In my view, the explosive earnings growth of Facebook and Amazon has led to a multiple squeeze showing the path to maturity for these companies. What I also found interesting was how much their return contributions resembled one of the more established companies covered, Berkshire Hathaway.

I think the companies that were big contributors to multiple expansion (Apple, Microsoft, UnitedHealth Group, and Costco) saw their multiples increase as their competitive advantages increased over the time period studied. I also believe that systematic factors such as lower interest rates, lower corporate tax rates and stable inflation also contributed to multiple expansion during this period. See how the systematic environment potentially changes over time may affect these positions differently than companies more committed to earnings growth over the past 9 years (Alphabet, Berkshire Hathaway, Home Depot and Visa)

After seeing how different fundamental components contribute to total stock returns, what type of driver combination do you prefer?

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