Investing isn't easy. Even Warren Buffett counsels that most investors should invest in a low-cost index like the S&P 500. That way, "you'll be buying into a wonderful industry, which in effect is all of American industry," he says.
But there are, of course, companies whose long-term fortunes differ substantially from the index. In this series, we look at how members of the S&P 500 have performed compared with the index itself.
Step on up, Eaton (NYS: ETN) .
Eaton shares have moderately outperformed the S&P 500 over the past three decades:
Source: S&P Capital IQ.
Since 1980, shares have returned an average of 12.5% a year, compared with 11.1% a year for the S&P (both include dividends). That difference adds up fast. One thousand dollars invested in the S&P in 1980 would be worth $29,400 today. In Eaton, it'd be worth $43,700.
Dividends accounted for a lot of those gains. Compounded since 1980, dividends have made up 66.5% of Eaton's total returns. For the S&P, dividends account for 41.5% of total returns.
And now have a look at how Eaton's earnings compare with S&P 500 earnings:
Source: S&P Capital IQ.
Perhaps surprisingly, there's slight underperformance. Since 1995, Eaton's earnings per share have grown by an average of 5.7% a year, compared with 6.0% a year for the broader index.
But that earnings-growth dynamic doesn't seem to have impacted valuations. Eaton has traded for an average of 21.3 times earnings since 1980 -- the exact same average as the S&P 500.
Through it all, the company has still been an above-average performer historically.
The question is whether that can continue. That's where you come in. Our CAPS community currently ranks Eaton with a five-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below, or add Eaton to My Watchlist.
At the time thisarticle was published Fool contributorMorgan Houseldoesn't own shares in any of the companies mentioned in this article. Follow him on Twitter,@TMFHousel. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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