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, Google (Nasdaq: GOOG).

Google shares have returned a whopping 494% since going public in 2004. How'd they get there?

The company doesn't pay a dividend, so you can scratch that off the list.

Earnings growth has been spectacular: Google's earnings per share have grown at an average rate of 58% a year since going public. That's simply incredible.

But for earnings to grow at 58% a year for seven years while shares returned 494% doesn't quite add up. Think of it this way: Since going public, Google's earnings have grown by fifteen-fold while its shares have grown about fivefold.

This chart explains why that happened:

Source: S&P Capital IQ.

Almost without pause, Google's valuation multiple has marched downward since going public. This isn't unique to Google. Over the past seven years, the same is true for other large-cap techs like Apple (Nasdaq: AAPL) and Cisco (Nasdaq: CSCO). Put simply, the market doesn't value $1 of Google's earnings like it did in the past, and therefore shareholder returns haven't kept pace with earnings growth.

The good news is that, at 25 times earnings, Google doesn't look that overvalued for a company of it strength and potential. Going forward, investors can likely expect to see more of Google's earnings growth reflected in shareholder returns.

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.