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

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, CVS Caremark (NYSE: CVS  ) .

CVS Caremark shares (and their predecessors) have moderately outperformed the S&P 500 over the last three decades:

Source: S&P Capital IQ.

Since 1980, shares returned an average of 13% 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 CVS Caremark, it'd be worth $51,200.

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

Now have a look at how CVS Caremark's earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Significant outperformance. Since 1995, CVS Caremark's earnings per share have grown by an average of 15.5% a year, compared with 6% a year for the broader index.

But that earnings-growth dynamic hasn't led to superior valuations. CVS Caremark has traded for an average of 20.6 times earnings since 1980 -- a slight discount to the 21 times earnings the S&P 500 averaged during the period.

Through it all, the company has still been an above-average performer historically.

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