Stocks for the Long Run: Emerson Electric 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, Emerson Electric (NYSE: EMR  ) .

Emerson Electric shares have modestly outperformed the S&P 500 over the last three decades, with most of the outperformance occurring in recent years:

Source: S&P Capital IQ.

Since 1980, shares 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. A thousand dollars invested in the S&P in 1980 would be worth $29,400 today. In Emerson Electric, it'd be worth $43,600.

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

Now have a look at how Emerson Electric's earnings have compared with the S&P 500's earnings:

Source: S&P Capital IQ.

Again, we see modest outperformance. Since 1995, Emerson Electric's earnings per share have grown by an average of 6.9% a year, compared with 6% a year for the broader index.

What has it all meant for valuations? Emerson Electric has traded for an average of 21 times earnings since 1980 -- about the same for the broader S&P 500. It's far different today, however. Emerson Electric currently trades for just more than 12 times forward earnings.

Through it all, Emerson Electric's shares have still been outperformers 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 Emerson Electric with a five-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below or add Emerson Electric 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. Motley Fool newsletter services have recommended buying shares of Emerson Electric. 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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  • Report this Comment On June 20, 2012, at 5:20 PM, midnightmoney wrote:

    Hmmm, nobody biting here, so I will. In 2010 I bought shares of four companies: apple, berkshire, ebix, and emerson. I rode berkshire up to 83 and sold so that I could a) avoid having to read any more about warren buffett (go on, hurl your best invective, roll your eyes, let out a knowing little sigh of pity on my behalf) and b) so I could buy afsi, which has gained 40% since I bought in 2011--40% more than the vaunted berkshire, by the way. I thank the Jeff Fisher and the fool for educating me enough to even know that that company's numbers fairly glow. Ebix will drag its quirky hide from the ashes it has produced so copiously over the last two years to finally make me some money, or at least the numbers behind it would lead one to think. That brings me to emerson, the only company of the four I would throw more money behind at this point. I bought it because it is consistent and they are a straight talking lot of people, especially the ceo, who I would not last more than 2 minutes in a room with without one of us getting all wild-eyed and bulgy of neck veins. Nonetheless, the dividend speaks volumes, the timely form 8k's appear like clockwork a month before earnings to let us know what we can expect, so I trust them and will probably hold til I retire. I am a big fan of emerson's honesty, especially in the face of the relative problems they've had.

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