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

A long history of returns.

Investing isn't easy. Even Warren Buffett counsels 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, IBM (NYSE: IBM  ) .

IBM shares have, perhaps surprisingly, underperformed the S&P 500 over the last three decades:

Source: S&P Capital IQ.

Since 1980, shares returned an average of 11% a year, compared with 11.1% a year for the S&P (both include dividends). A thousand dollars invested in the S&P in 1980 would be worth $29,400 today -- and about the same amount if invested in IBM, naturally.

Dividends accounted for a lot of those gains. Compounded since 1980, dividends have made up 55.5% of IBM's total returns. For the S&P, dividends account for 41.5% of total returns.

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

Source: S&P Capital IQ.

Here we see some outperformance. Since 1995, IBM's earnings per share have grown by an average of 9.4% a year, compared with 6% a year for the broader index, with most of the difference taking place over the last few years alone. That's testament to the power of the company's ability to adapt over the years.

But that earnings-growth dynamic hasn't led to superior valuations. IBM has traded for an average of 21 times earnings since 1980, compared with 21.3 times for the S&P.

Add it all up, and IBM, to my surprise, has been a fairly average company for most of the last three decades.

The question is whether that will continue. That's where you come in. Our CAPS community currently ranks IBM with a four-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below or add IBM 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 owns shares of International Business Machines. 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.

Read/Post Comments (2) | Recommend This Article (1)

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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 Report this Comment icon found on every comment.

  • Report this Comment On June 07, 2012, at 4:58 PM, GrnMtnMark wrote:

    This article overlooks the fact that its numnbers are based on several different IBMs over that time period. Thirty years ago, IBM was a hardware company with the mainframe serving as the cash cow. John Akers, who, in Dylan's words, "...didn't notice that the lights have changed," almost ran the company aground. Lou Gerstner opened up IBM's insular culture and transformed it from being a market dictator to a market responder. As a result, today's Smarter Planet is a perfect culmination of this transition. IBM is no longer a hardware company; it is a software and services company (while supplying hardware when it's part of a solution). So look at what has resulted from this revolution; Just plot IBM's share price against the S&P over the last five years and ask yourself: for the long term, wouldn't you like to invest in a company that is performing like this? ...has dominated its industry for more than half a century? ...has demonstrated that it can change as its markets change? ...has been paying dividends since 1913 ( ...has increased its dividend by an average of 16% a year over the last five years? ...and makes money by helping other companies and governments worldwide of all sizes operate more cost effectively and compete more strategically.

    A lot of people have slept well at night for many years by owning IBM. There aren't many stocks I would dare buy and not look at again for 30 years, but IBM sure is one of them.

  • Report this Comment On June 08, 2012, at 12:46 PM, TMFMorgan wrote:

    Thanks for your comments.

    <<This article overlooks the fact that its numnbers are based on several different IBMs over that time period. >>

    From the article:

    "That's testament to the power of the company's ability to adapt over the years."

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