Stocks for the Long Run: Illinois Tool Works 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, Illinois Tool Works (NYS: ITW) .

Illinois Tool Works shares have crushed the S&P 500 over the last three decades:

Source: S&P Capital IQ.

Since 1980, shares returned an average of 16.5% 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 Illinois Tool Works, it'd be worth $133,450.

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

Now have a look at how Illinois Tool Works earnings compared with S&P 500 earnings:

Source: S&P Capital IQ.

Pretty steady outperformance. Since 1995, earnings per share have grown by an average of 9% a year, compared with 6% a year for the broader index.

What's it all meant for valuations? Not much. Illinois Tool Works has traded for an average of 21 times earnings since 1980 -- exactly the same as the broader S&P 500.

Through it all, Illinois Tool Works shares have clearly been 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 Illinois Tool Works with a four-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below, or add Illinois Tool Works to My Watchlist.

At the time thisarticle was published Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended buying shares of Illinois Tool Works. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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