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
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.
