Stocks for the Long Run: Northeast Utilities 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, Northeast Utilities (NYS: NU) .

Northeast Utilities shares have matched the S&P 500 over the last three decades, with much less volatility:

Source: S&P Capital IQ.

Since 1980, shares have returned an average of 11.1% a year -- exactly the same as the S&P (both include dividends). One thousand dollars invested in either the S&P or Northeast Utilities in 1980 would be worth $29,400 today.

Dividends accounted for a lot of those gains. Compounded since 1980, dividends have made up almost 90% of Northeast Utilities' total returns. For the S&P, dividends account for 41.5% of total returns.

Now have a look at how Northeast Utilities earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Pretty ugly. Since 1995, earnings per share have actually declined by an average of 1.9% a year, compared with 6% annual growth for the broader index.

What's that meant for valuations? Northeast Utilities has traded for an average of 24 times earnings since 1980 -- markedly above the 21 times earnings of the broader S&P 500.

Through it all, shares have been average performers 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 Northeast Utilities with a three-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below, or add Northeast Utilities 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. 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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