Stocks for the Long Run: Northrop Grumman 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 individual stocks have performed against the broad S&P 500.

Step on up, Northrop Grumman (NYS: NOC) .


Northrop Grumman shares have underperformed the S&P 500 over the past quarter-century:

Source: S&P Capital IQ.

Since 1987, shares have returned an average of 8.1% a year, compared with 9.7% a year for the S&P (both include dividends). One thousand dollars invested in the S&P in 1987 would be worth $19,200 today. In Northrop Grumman, it'd be worth $11,900.

Dividends accounted for a lot of those gains. Compounded since 1987, dividends have made up about two-thirds of Northrop Grumman's returns. For the S&P, dividends account for 39% of total returns.

Now have a look at how Northrop Grumman earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Some outperformance here. Since 1995, Northrop Grumman's earnings per share have grown by an average of 6.8% a year, compared with 6% a year growth for the broader index.

What's that meant for valuations? Northrop Grumman has traded for an average of 21 times earnings since 1987 -- just below the 24 times earnings for the broader S&P 500.

Through it all, shares have been slight disappointments over the past quarter-century.

Of course, the important question is whether that will continue. That's where you come in. Our CAPS community currently ranks Northrop Grumman with a three-star rating (out of five). Care to disagree? Leave your thoughts in the comment section below, or add Northrop Grumman to My Watchlist.

The article Stocks for the Long Run: Northrop Grumman vs. the S&P 500 originally appeared on Fool.com.

Fool contributor Morgan Housel has no positions in the stocks mentioned above. The Motley Fool owns shares of Northrop Grumman. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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