Stocks for the Long Run: Medtronic 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, Medtronic (NYS: MDT) .

Medtronic shares have crushed the S&P 500 over the last three decades, with almost all of the outperformance occurring the late 1990s:


Source: S&P Capital IQ.

Since 1980, shares returned an average of 15.6% 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 Medtronic, it'd be worth $103,000.

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

Now have a look at how Medtronic's earnings compared with S&P 500 earnings:


Source: S&P Capital IQ.

Again, significant outperformance. Since 1995, Medtronic's earnings per share have grown by an average of 12.3% a year, compared with 6% a year for the broader index. Shares haven't kept up with that earnings growth in more recent years because they were grossly overvalued a decade ago. In a sense, share returns in the late 1990s stole from returns over the last decade.

What's it all meant for valuations? Medtronic has traded for an average of 33.4 times earnings since 1980 -- compared with 21 times earnings the S&P 500 averaged during the period. It's far different today, however. Medtronic currently trades for just over 11 times earnings.

Through it all, Medtronic's shares have been clear outperformers over the last three decades.

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