Tuesday, December 25, 2012

Stocks for the Long Run: 3M vs. the S&P 500

Investing isn't easy. Even Warren Buffett counsels that most investors should invest in a low-cost index like the S&P 500. That way, "you'll be buying into a wonderful industry, which in effect is all of American industry," he says.

But there are, of course, companies whose long-term fortunes differ substantially from the index. In this series, we look at how members of the S&P 500 have performed compared with the index itself.

Step on up, 3M (NYSE: MMM  ) .

3M shares have handily outperformed the S&P 500 over the last three decades:

Source: S&P Capital IQ.

Since 1980, shares returned an average of 12.3% a year, compared with 11.1% a year for the S&P (both include dividends). That difference adds up fast. One thousand dollars invested in the S&P in 1980 would be worth $29,400 today. In 3M, it'd be worth $40,900.

Dividends accounted for a lot of that gain. Compounded since 1980, dividends have made up 66.3% of 3M's total returns. For the S&P, dividends account for 41.5% of total returns.

And now have a look at how 3M's earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Again, pretty solid outperformance. Since 1995, 3M's earnings per share have grown by an average of 7.5% a year, compared with 6% a year for the broader index. That's testament to the power of the company's brand, strong international growth, and smart management that has pieced together its conglomerate operations without losing focus. �

But, perhaps oddly, that earnings-growth dynamic hasn't led to superior valuations. 3M has traded for an average of 20.8 times earnings since 1980, compared with 21.3 times for the S&P.

Still, the company has been an above-average performer historically.

The question is whether that can continue. That's where you come in. Our CAPS community currently ranks 3M with a five-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below, or add 3M to My Watchlist.

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