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, Eaton
Eaton shares have moderately outperformed the S&P 500 over the past three decades:
Source: S&P Capital IQ.
Since 1980, shares have returned an average of 12.5% 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 Eaton, it'd be worth $43,700.
Dividends accounted for a lot of those gains. Compounded since 1980, dividends have made up 66.5% of Eaton's total returns. For the S&P, dividends account for 41.5% of total returns.
And now have a look at how Eaton's earnings compare with S&P 500 earnings:
Source: S&P Capital IQ.
Perhaps surprisingly, there's slight underperformance. Since 1995, Eaton's earnings per share have grown by an average of 5.7% a year, compared with 6.0% a year for the broader index.
But that earnings-growth dynamic doesn't seem to have impacted valuations. Eaton has traded for an average of 21.3 times earnings since 1980 -- the exact same average as the S&P 500.
Through it all, the company has still been an above-average performer historically.
The question is whether that can continue. That's where you come in. Our CAPS community currently ranks Eaton with a five-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below, or add Eaton to My Watchlist.
