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

A long history of returns.

Investing isn't easy. Even Warren Buffett advises that most investors 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 that of 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, Johnson & Johnson (NYS: JNJ) .

Johnson & Johnson shares have simply crushed the S&P 500 over the last three decades:

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Source: S&P Capital IQ.

Since 1980, shares returned an average of 14.7% a year, compared with 11.1% a year for the S&P (both include dividends). That difference adds up fast. A thousand dollars invested in the S&P in 1980 would be worth $29,400 today. In Johnson & Johnson, it would be worth $80,600.

Dividends accounted for a lot of that gain. Compounded since 1980, dividends have made up 48.5% of Johnson & Johnson's total returns. For the S&P, dividends account for 41.5% of total returns.

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

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Source: S&P Capital IQ.

Again, significant outperformance. Since 1995, Johnson & Johnson's earnings per share have grown by an average of 8.9% a year, compared with 6% a year for the broader index. That's testament to the power of the company's brands, its global reach, its unique decentralization of business subsidiaries, and its center-stage position in one of the fastest-growing industries around -- health care.

That earnings-growth dynamic has also played a role in valuations. Johnson & Johnson has traded for an average of 25.4 times earnings since 1980, compared with 21.3 times for the S&P.

The company has been, without a doubt, an above-average performer historically.

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

At the time this article was published 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 Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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