Stocks for the Long Run: Wal-Mart vs. the S&P 500

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, Wal-Mart (NYS: WMT) .

Wal-Mart shares have, not surprisingly, demolished the S&P 500 over the last three decades:

Source: S&P Capital IQ.

Since 1980, shares returned an average of 22% a year, compared with 11.1% a year for the S&P (both include dividends). That difference adds up incredibly fast. One thousand dollars invested in the S&P in 1980 would be worth $29,400 today. In Wal-Mart, it'd be worth $580,800.

Dividends accounted for a lot of those gains. Compounded since 1980, dividends have made up about a quarter of Wal-Mart's total returns. For the S&P, dividends account for 41.5% of total returns.

And now have a look at how Wal-Mart's earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Again, significant outperformance. Since 1995, Wal-Mart's earnings per share have grown by an average of 13.4% a year, compared with 6% a year for the broader index. And not all of that earnings growth is a factor of being a young company enjoying hyperactive expansion; even as Wal-Mart grew to a giant over the last decade, earnings growth continued at a high clip.

That earnings-growth dynamic has also led to superior valuations. Wal-Mart has traded for an average of 27.6 times earnings since 1980, compared with 21.3 times for the S&P.

The company without a doubt has been an above-average performer historically.

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

At the time thisarticle was published Fool contributorMorgan Houselowns shares of Wal-Mart. Follow him on Twitter @TMFHousel.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Wal-Mart Stores. The Motley Fool has a disclosure policy. We Fools may not 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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