Despite constant attempts by analysts and the media to complicate the basics of investing, there are only three ways a stock can create value for 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, Coach
Coach shares returned a whopping 1,395% over the last decade. How'd they get there?
Dividends added only a small amount, as the company just recently began issuing payouts. Without dividends, Coach shares returned 1,351% over the last 10 years.
Earnings growth was remarkably strong. Coach's normalized earnings per share grew an average of 31.1% a year from 2001 until today. That trounces the market average, and is multiple times higher than the earnings growth achieved at other luxury goods manufactures like Tiffany
And have a look at Coach's valuation multiple:
Source: S&P Capital IQ.
While trading in a wide range, Coach's P/E ratio today is almost exactly where it was 10 years ago. That's fairly rare. Most companies were overvalued 10 years ago, and falling valuation multiples ever since have kept shareholder returns low even while earnings grow, highlighting the fact that starting valuations determine future returns. Indeed, substantially all of Coach's cumulative 10-year returns have occurred since 2008, when valuations slumped to the single digits.
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.
- Add Coach to My Watchlist.
Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Coach. Motley Fool newsletter services have recommended buying shares of Coach. 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.