Stocks for the Long Run: American Electric Power 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 individual stocks have performed against the broad S&P 500.

Step on up, American Electric Power (NYS: AEP) .

American Electric Power shares have underperformed the S&P 500 over the past quarter-century:

Source: S&P Capital IQ.

Since 1987, shares have returned an average of 7.8% a year, compared with 9.7% a year for the S&P (both include dividends). That difference adds up fast. One thousand dollars invested in the S&P in 1987 would be worth $19,200 today. In American Electric Power, it'd be worth $10,900.

Dividends accounted for a lot of those gains. Compounded since 1987, dividends have made up about 90% of American Electric Power's total returns. For the S&P, dividends account for 39% of total returns.

Now have a look at how American Electric Power earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Pretty heavy underperformance here. Since 1995, American Electric Power earnings per share have increased by an average of 1.5% a year, compared with 6% a year for the broader index.

What's that meant for valuations? American Electric Power has traded for an average of 15 times earnings since 1987 -- below the 24 times earnings of the broader S&P 500.

Through it all, shares have been slight disappointments over the past quarter-century.

Of course, the important question is whether that will continue. That's where you come in. Our CAPS community currently ranks American Electric Power with a three-star rating (out of five). Care to disagree? Leave your thoughts in the comment section below, or add American Electric Power to My Watchlist.

The article Stocks for the Long Run: American Electric Power vs. the S&P 500 originally appeared on Fool.com.

Fool contributorMorgan Houseldoesn't own shares in any of the companies mentioned in this article. Follow him on Twitter,@TMFHousel. We Fools don't 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. The Motley Fool has a disclosure policy.

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