Stocks for the Long Run: Cummins vs. the S&P 500

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Investing isn't easy. Even Warren Buffett counsels that most investors should invest in a low-cost index like the S&P 500. He says that way "you'll be buying into a wonderful industry, which in effect is all of American industry."

But there are, of course, companies whose long-term fortunes differ substantially from the index. In this series, we look at how individual stocks have performed against the broad S&P 500.

Step on up, Cummins (NYSE: CMI) .                                                    

Cummins shares have easily outperformed the S&P 500 over the last quarter-century, with most of the outperformance occurring in the last few years:

Source: S&P Capital IQ.

Since 1987, shares have returned an average of 12.7% a year, compared with 9.7% a year for the S&P (both include dividends). That difference adds up fast. One thousand dollars invested in the S&P in 1987 would be worth $19,200 today. In Cummins, it'd be worth $45,600.

Dividends accounted for a lot of those gains. Compounded since 1987, dividends have made up about half of Cummins' total returns. For the S&P, dividends account for 39% of total returns.

Now have a look at how Cummins earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Strong outperformance here, too. Since 1995, Cummins earnings per share have increased by an average of 12.7% a year, compared with 6% a year for the broader index.

What's that meant for valuations? Cummins has traded for an average of 22 times earnings since 1987 -- just below the 24 times earnings of the broader S&P 500. It's far different today, however. Cummins currently trades for about nine times next year's expected earnings.

Through it all, shares have been strong performers over the last quarter-century.  

Of course, the important question is whether that will continue. That's where you come in. Our CAPS community currently ranks Cummins with a five-star rating (out of five). Care to disagree? Leave your thoughts in the comment section below, or add Cummins to My Watchlist.

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