Stocks for the Long Run: Limited Brands 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, Limited Brands (NYSE: LTD  ) .

Limited Brands shares have easily outperformed the S&P 500 over the past quarter-century, with most of the outperformance coming in recent years:

Source: S&P Capital IQ.

Since 1987, shares have returned an average of 10.5% a year, compared with 9.7% a year for the S&P (both include dividends). One thousand dollars invested in the S&P in 1987 would be worth $19,200 today. In Limited Brands, it'd be worth $24,100.

Dividends accounted for a lot of those gains. Compounded since 1987, dividends have made up about 60% of Limited Brands' total returns. For the S&P, dividends account for 39% of total returns.

Now have a look at how Limited Brands earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Good outperformance here, too. Since 1995, Limited Brands' earnings per share have grown by an average of 11.6% a year, compared with 6% a year for the broader index.

What's that meant for valuations? Limited Brands has traded for an average of 18 times earnings since 1987 -- just below the 24 times earnings for 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 Limited Brands with a three-star rating (out of five). Care to disagree? Leave your thoughts in the comment section below, or add Limited Brands 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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  • Report this Comment On October 26, 2012, at 12:01 PM, Momintn wrote:

    LTD will outperform in the future as well. This next quarter though is the quarter they report the smallest earnings while the next quarter Q4 is the big one after Christmas. So look to buy LTD in a fall sell off or a summer sell off with the market.

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