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, Sherwin-Williams (NYSE: SHW).

Sherwin-Williams shares returned 276% over the last decade. How'd they get there?

Dividends made up a good chunk of it. Without dividends, shares returned 206% over the past 10 years.

Earnings growth was fairly strong. Sherwin-Williams' normalized earnings per share grew at an average rate of 9.6% per year from 2001 until today. That's well above the market average, and stronger than others in the building materials space such as Vulcan Materials (NYSE: VMC) and HB Fuller (NYSE: FUL). 

But if earnings grew 9.6% per year, why were shareholder returns so much higher? This chart helps explain it:

Source: S&P Capital IQ.

Sherwin-Williams' valuation multiple actually increased over the last 10 years. That's extremely rare these days: most companies were overvalued 10 years ago, stifling returns ever since even as earnings by and large grew. Remember, starting valuations determine future returns.

That's a lesson Sherwin-Williams' investors should keep in mind today. At 20 times earnings, shares aren't exactly cheap. Over the past decade, expanding valuations meant shareholder returns exceeded earnings growth. Today's rich multiples could mean that, over the coming decade, returns lag earnings growth as valuations come down to earth.

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.