Stocks for the Long Run: Altria 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, Altria (NYSE: MO  ) .

Altria shares have simply crushed the S&P 500 over the past three decades:

Source: S&P Capital IQ.

Source: S&P Capital IQ.

Since 1980, shares returned an average of 21.1% a year, compared with 11.1% a year for the S&P (both include dividends). That difference adds up really fast. One thousand dollars invested in the S&P in 1980 would be worth $29,400 today. In Altria, it'd be worth $453,126.

Dividends accounted for a lot of those gains. Compounded since 1980, dividends have made up a staggering 96% of Altria's total returns. For the S&P, dividends account for 41.5% of total returns.

Now have a look at how Altria earnings compared with S&P 500 earnings:

Source: S&P Capital IQ.

Source: S&P Capital IQ.

Pretty good outperformance in recent years. Over the last five years, Altria's earnings per share have grown by an average of 4.4% a year, compared with 2% a year for the broader index. Despite declining smoking rates, Altria has been able to keep its earnings intact largely through pricing power.

What's it all meant for valuations? This might surprise you: Altria has traded for an average of 12 times earnings since 1980 -- way below the 21 times earnings for the broader S&P 500. It's that low valuation that has supercharged returns, as a high dividend yield compounded quickly when dividends were reinvested.

Through it all, Altria shares have clearly been outperformers over the past three decades.  

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

Fool contributor Morgan Housel owns shares of Altria. Follow him on Twitter, @TMFHousel. We Fools don't 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. The Motley Fool has a disclosure policy.


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