Stocks for the Long Run: Eli Lilly 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, Eli Lilly (NYSE: LLY  ) .

Eli Lilly shares have just slightly outperformed the S&P 500 over the last three decades, with pretty heavy underperformance in more recent years:

Source: S&P Capital IQ.

Since 1980, shares returned an average of 11.3% a year, compared with 11.1% a year for the S&P (both include dividends). One thousand dollars invested in the S&P in 1980 would be worth $29,400 today, and about $1,000 more than that in Eli Lilly.

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

Now have a look at how Eli Lilly's earnings compared with S&P 500 earnings:

Source: S&P Capital IQ.

Not bad at all. Since 1995, Eli Lilly's earnings per share have grown by an average of 8.3% a year, compared with 6% a year for the broader index. Shares haven't kept up with that earnings growth because they were grossly overvalued a decade ago. In a sense, share returns in the late 1990s stole from returns over the last decade.

What's it all meant for valuations? Eli Lilly has traded for an average of 27.2 times earnings since 1980 -- compared with 21 times earnings the S&P 500 averaged during the period. It's far different today, however. Eli Lilly currently trades for less than 11 times earnings.

Through it all, Eli Lilly's shares have been fairly average performers over the last three decades.  

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