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:
- Earnings growth.
- 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, AT&T
AT&T shares have returned 23% over the past decade. How'd they get there?
Dividends are owed most of the credit. Without dividends, shares actually generated a 27% loss over the past 10 years.
Earnings growth was dismal. Since 2001, AT&T's normalized earnings per share have shrunk at an average rate of about 3.5% a year. Much of the decline stems from a surge in the number of shares outstanding, which grew by more than 70% over the period.
And have a look at AT&T's valuation multiple:
Source: S&P Capital IQ.
Compared with 10 years ago, AT&T's current valuation multiple is almost exactly where it started. On the contrary, competitor Verizon's
In general, investors shouldn't expect wild swings in the valuation multiple of utility-type companies, since earnings volatility tends to be much less dramatic than other industries. Investors in these companies shouldn't be looking to shoot for the moon. Instead, slow, steady growth that closely tracks earnings and dividends is what should be aimed for. And at AT&T, that's about what shareholders have received.
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.
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Fool contributor Morgan Housel owns shares of AT&T. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended buying shares of AT&T. 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.