A Brief History of Amgen's Returns

Despite constant attempts by analysts and the media to complicate the basics of investing, there are only three ways a stock can create value for shareholders:

  1. Dividends.

  2. Earnings growth.

  3. Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, Amgen (NAS: AMGN) .

Amgen shares declined 17% over the past decade. How'd they get there?

The company just started paying a dividend, so that hardly made a difference. Without dividends, shares dropped 16% over the last 10 years.

Earnings growth was remarkably strong. Amgen's normalized earnings per share grew at an average rate of 12.7% per year from 2001 until today. That's well above the market average, and leaps and bounds stronger than other companies like Pfizer (NYS: PFE) and Merck (NYS: MRK) .

But if Amgen's earnings were so strong, why were its returns so low? This chart explains it:


Source: S&P Capital IQ.

Shares were obscenely overvalued a decade ago, trading at over 60 times earnings. Expectations were nearly impossible to meet, and so shares have spent the better part of the last 10 years watching valuation multiples contract. That's prevented all of Amgen's strong earnings growth from turning into shareholder returns -- an outcome that was entirely predictable a decade ago.

It's a different story today. At 16 times earnings, shares may not be cheap, but they're hardly expensive, particularly given Amgen's decent growth prospects. The past decade stifled shareholder returns as valuations dropped even as earnings grew. The coming decade has a far better chance of stable valuations amid a continuation of earnings growth, providing a much-needed -- and well-deserved -- boost for patient investors.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

At the time thisarticle was published

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