Stocks for the Long Run: Consolidated Edison 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, Consolidated Edison (NYSE: ED  ) .

Consolidated Edison shares have crushed the S&P 500 over the past three decades:

Source: S&P Capital IQ.

Since 1980, shares returned an average of 14.7% 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 Consolidated Edison, it'd be worth $81,600.

Dividends accounted for a lot of those gains. Compounded since 1980, dividends have made up a staggering 89% of Consolidated Edison's total returns. For the S&P, dividends account for 41.5% of total returns.

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

Source: S&P Capital IQ.

Maybe surprisingly given shareholder returns, there's underperformance. Since 1995, Consolidated Edison's earnings per share have grown by an average of 1% a year, compared with 6% a year for the broader index. Even for a utility, that's poor. Earnings growth should at least match inflation over time.

What's it all meant for valuations? Consolidated Edison has traded for an average of 15 times earnings since 1980 -- 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, Consolidated Edison 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 Consolidated Edison with a four-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below, or add Consolidated Edison to My Watchlist.

Fool contributor Morgan Housel owns shares of Consolidated Edison. 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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