A Brief History of Halliburton's Returns (HAL)

A Brief History of Halliburton's Returns

By Motley Fool Staff | More Articles
December 13, 2011 | Comments (0)

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:

Dividends.
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, Halliburton (NYSE: HAL ) .

Halliburton shares returned 467% over the last decade. How'd they get there?

Dividends accounted for a good chunk. Without dividends, shares returned 391% over the last 10 years.

Earnings growth was substantial. Halliburton's normalized earnings per share grew at an average rate of 18% a year from 2001 until today. That's far above the market average, and easily ahead of rivals Schlumberger (NYSE: SLB ) and Baker Hughes (NYSE: BHI ) .

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

Source: S&P Capital IQ.

The big spike and subsequent gap around 2002 was caused by a temporary dearth of earnings. Ignore it. What's important is that Halliburton's earnings multiple is about the same today as it was 10 years ago.

That's fairly rare these days. Most large-cap companies were overvalued a decade ago, and falling multiples ever since have prevented earnings growth from turning into shareholder returns. Since Halliburton shares were fairly valued 10 years ago -- who wanted to own a lowly energy services company during the dot-com bubble, after all -- shareholder returns ever since have tracked earnings growth, fueling above-average returns. This is a simple observation that drives home one of the most important lessons in investing: starting valuations determine future 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.

Add Halliburton to My Watchlist.

The Steve Jobs Betrayal
You may already know that in the final year of his life, Jobs revealed a stunning betrayal — and told his biographer, "I will spend my last dying breath... and every penny of Apple's $40 billion in the bank to right this wrong." What was it that made Jobs so irate — and why could it make a few in-the-know investors some major profits over the coming months and years?

Enter your email address below to find out what made Jobs so enraged!

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.