Stocks for the Long Run: Legg Mason 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, Legg Mason (NYSE: LM  ) .

Legg Mason shares have slightly underperformed the S&P 500 over the past quarter-century, driven by a big decline in recent years:

Source: S&P Capital IQ.

Since 1987, shares have returned an average of 8.7% 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 Legg Mason, it'd be worth just $14,300.

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

Now have a look at how Legg Mason earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Decent outperformance here, albeit with much more volatility. Since 1995, Legg Mason's earnings per share have increased by an average of 8.8% a year, compared with 6% a year for the broader index.

What's that meant for valuations? Legg Mason has traded for an average of 20 times earnings since 1987 -- below the 24 times earnings for the broader S&P 500. It's far different today, however. Legg Mason shares currently trade for about 11 times next year's expected earnings.

Through it all, shares have been modest 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 Legg Mason with a four-star rating (out of five). Care to disagree? Leave your thoughts in the comment section below, or add Legg Mason 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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