Stocks for the Long Run: Varian Medical Systems 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 individual stocks have performed against the broad S&P 500.

Step on up, Varian Medical Systems (NYSE: VAR  ) .

Varian Medical Systems shares have easily outperformed the S&P 500 over the past quarter-century, with most of the outperformance occurring in the past decade:

Source: S&P Capital IQ.

Since 1987, shares have returned an average of 14.5% a year, compared with 9.7% a year for the S&P (both include dividends). That difference adds up fast. One thousand dollars invested in the S&P in 1987 would be worth $19,200 today. In Varian Medical Systems, it'd be worth $76,200.

Dividends accounted for a lot of those gains. Compounded since 1987, dividends have made up about a third of Varian Medical Systems' total returns. For the S&P, dividends account for 39% of total returns.

Now have a look at how Varian Medical Systems earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Nice outperformance here, too. Since 1995, Varian Medical Systems earnings per share have increased by an average of 8.9% a year, compared with 6% a year for the broader index.

What's that meant for valuations? Varian Medical Systems has traded for an average of 24 times earnings since 1987 -- nearly identical to the broader S&P 500.

Through it all, shares have been strong performers over the past quarter-century.

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

Fool contributor Morgan Housel and The Motley Fool have no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 08, 2012, at 10:19 PM, mariavas wrote:

    It does not appear VAR has divident. The P/E is 16. Am I missing something?

  • Report this Comment On October 09, 2012, at 7:32 AM, TMFMorgan wrote:

    Hi Mariavas,

    Thanks for your comments. The dividends mentioned in the article are compounded over the last 25 years. So while you're right that VAR doesn't pay a current dividend, it did in the past, and those past dividends account for a lot of its 25-year total returns. Also, the PE mentioned in this article is the 25-year average, not the current multiple.

    Thanks,

    Morgan

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