Despite constant attempts by analysts and the media to complicate the basics of investing, there are only three ways a stock can create value for shareholders:

  1. Dividends.
  2. Earnings growth.
  3. 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, Stanley Black & Decker (NYSE: SWK).

Stanley Black & Decker shares returned 101% over the past decade. How'd they get there?

Dividends pulled about half the weight. Without dividends, shares returned 53% over the past 10 years.

Earnings growth was fairly tame. Stanley Black & Decker's normalized earnings per share grew by an average of 5.4% a year from 2001 until today. That's about on par with the market average, but below that of Snap-on (NYSE: SNA) or Makita (Nasdaq: MKTAY).

And have a look at the company's valuation multiple:

Swkhistory

Source: S&P Capital IQ.

This is actually rare: Stanley Black & Decker's P/E ratio stayed in a fairly tight range over the past decade, and is currently about where it stood in 2001. That means, in terms of earnings growth, shareholders received exactly what they paid for. Most companies can't say the same -- the average mid- and large-cap company was overvalued 10 years ago, and spent the better part of the last decade watching valuations shrink, preventing earnings growth from turning into shareholder returns. The fact that Stanley Black & Decker was reasonably valued 10 years ago let the company's mediocre earnings growth produce mediocre shareholder returns.

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.