Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:
- Earnings growth.
- Changes in valuation multiples.
In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, US Bancorp (NYSE: USB ) .
US Bancorp shares returned 110% over the past decade. How'd they get there?
Dividends accounted for more than half of the gains. Without dividends, shares returned 47% over the past 10 years.
Earnings growth was decent, considering the financial crisis in 2008 and 2009. Normalized earnings per share grew at an average rate of 5.2% a year over the past 10 years.
And look what's happened to valuation multiples:
Source: S&P Capital IQ.
Like most banks, the market values US Bancorp's assets at a far lower premium than it did in the past. For the most part, that's rational: Loan demand in the U.S. has been weak, net interest margins are shrinking, and regulations are still up in the air. It's far worse for other banks: Bank of America (NYSE: BAC ) , Citigroup (NYSE: C ) , and JPMorgan Chase (NYSE: JPM ) all trade at a lower price-to-book ratio than US Bancorp.
Going forward, any improvement in the economy or rise in long-term interest rates could reverse that trend, sending valuations higher. While investors shouldn't expect valuations to return to the bubble days of 2006 and 2007, it's unlikely that they'll stay this low for good.
Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.