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:    

  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, H.J. Heinz (NYSE: HNZ).

Heinz shares returned 90% over the last decade. How'd they get there?

Dividends pulled most of the weight. Without dividends, shares returned just 33% over the last 10 years.

Earnings growth was fairly weak. Heinz's normalized earnings per share grew an average of just 2.3% a year from 2001 until today. That's below the market average but about on par with what others in the snack industry like ConAgra (NYSE: CAG) and Kraft (NYSE: KFT) produced over the period -- it's been rough going for food companies lately.

And have a look at Heinz's valuation multiple:

Source: S&P Capital IQ.

The big drop around 2002 was due to a temporary dearth of earnings near the turn of the decade -- ignore it. What's important here is that Heinz's valuation multiple has stayed in a fairly tight range over most of the last decade, with shares never becoming noticeably overvalued. That's allowed what little earnings growth it produced to turn into shareholder returns -- it's why, more simply, Heinz produced acceptable shareholder returns even as earnings growth nearly stalled. That should drive home one of the most important lessons in investing: starting valuations determine future returns.

This stuff might seem basic, but it's 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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.