Stocks for the Long Run: Merck vs. the S&P 500

Investing isn't easy. Even Warren Buffett councils 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 members of the S&P 500 have performed compared with the index itself.

Step on up, Merck (NYSE: MRK  ) .

Merck shares have modestly outperformed the S&P 500 over the last three decades:

Source: S&P Capital IQ.

Since 1980, shares returned an average of 13.3% a year, compared with 11.1% a year for the S&P (both include dividends). That difference adds up fast. One thousand dollars invested in the S&P in 1980 would be worth $29,400 today. In Merck, it'd be worth $53,700.

Dividends accounted for a lot of that gain. Compounded since 1980, dividends have made up 64% of Merck's total returns. For the S&P, dividends account for 41.5% of total returns.

And now have a look at how Merck's earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Not great -- mild underperformance. Since 1995, Merck's earnings per share have grown by an average of 3.3% a year, compared with 6% a year for the broader index. This is fairly standard in the large-cap pharmaceutical industry, which has struggled with competition from generics and a slowing pipeline for years. Furthermore, growth in spending on all prescription drugs has slowed in recent years.

That earnings-growth dynamic has still supported decent valuations. Merck has traded for an average of 21.7 times earnings since 1980, compared with 21.3 times for the S&P.

Through thick and thin, the company has been an above-average performer historically.

The question is whether that can continue. That's where you come in. Our CAPS community currently ranks Merck with a four-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below, or add Merck to My Watchlist.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not 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.


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  • Report this Comment On June 04, 2012, at 2:06 PM, MrSinnister wrote:

    Why not do an in-depth research report on both why Discovery Labs isn't moving and why now is the perfect time to both invest in Biotechs and DSCO? They have been major M&A targets the past Spring, and I don't see that stopping in the near future.

    Received FDA approval for 1 of its drugs, SURFAXIN, and its nebulizer Affectair on March 5th of this year. PPS Spiked at 5.39 until a week later, a secondary offering of 16 million shares @2.80 was submitted, killing the momentum from the FDA approval and leaving it in the doldrums where it sits today, lagging behind companies with only ONE drug and deeply in the red like Seattle Genetics SGEN, currently trading at over 19. DSCO is slated to have it's distribution pipeline for its infant RDS (Respiratory Distress Syndrome) drug out by the end of the year, with EU approval next year. Trading at currently 2.52, this stock could be the steal of the year, and can actually beat Bank of America (before the crises) as comeback stock or Stock of the Year. The volume is currently dismal as longs have rooted into their positions and currently not selling. Check it out and do your own due diligence.

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