Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:

  1. Dividends.
  2. Earnings growth.
  3. Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, IBM (NYSE: IBM).

IBM shares returned 92% to shareholders over the past decade? How'd they get there?

Dividends accounted for about one-quarter of it. Without dividends, IBM returned 68% over the past ten years.

Earnings growth was solid over the period. IBM's earnings per share have increased at an average rate of 10.7% per year for the past ten years. A lot of that growth was fueled by a reduction in the number of shares outstanding, which fell by over 30% over the past ten years.

That alone should have left shareholders with outsized results. Yet total returns have actually been fairly modest. Why? This chart explains it:

Source: S&P Capital IQ.

Like many large-cap companies, IBM's earnings multiple has come way down over the past decade, particularly in the years following the implosion of the dot-com bubble. That's sterilized a good chunk of the company's earnings growth. Put simply, the market doesn't value one dollar of IBM's earnings as much as it did in the past. For companies like Microsoft (Nasdaq: MSFT) and Wal-Mart (NYSE: WMT), this compression of earnings multiples has effectively snuffed out shareholder returns completely. Companies can do very well internally and watch their shares go nowhere. IBM hasn't suffered that fate over the past 10 years, but it's been close. The good news is that, now reasonably valued at 16 times earnings, shareholders aren't likely to endure the same fate going forward.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

Fool contributor Morgan Housel owns shares of Microsoft. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Microsoft, IBM, and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores and Microsoft, as well as creating a diagonal call position in Wal-Mart Stores and a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.