Total Shareholder Return (TSR) is a measure of financial performance, reflecting the total amount an investor earns from an investment, specifically, stocks or shares. To arrive at your total, usually expressed as a percentage, TSR factors in capital gains and stock dividends; it may also include special distributions, stock splits, and guarantees. However it is calculated, TSR means the same thing: the total amount a stock returned to those who invested in it.
key takeaways
- Total Shareholder Return (TSR) is a measure of financial performance, reflecting the total amount an investor earns from an investment, specifically, stocks or shares.
- Total shareholder return takes into account capital gains and dividends when measuring the total return generated by a stock.
- The formula for calculating TSR is {(current price – purchase price) + dividends} ÷ purchase price.
- TSR presents an easy-to-understand figure of the overall financial benefits generated for shareholders.
- TSR is a good measure of an investment’s long-term value, but it is limited to past performance, requires investment to generate cash flows, and can be sensitive to stock market volatility.
Understanding Total Shareholder Return (TSR)
An investor makes money from stocks in two basic ways: capital gains and current income. A capital gain is a change in the market price of the stock from the time it was purchased to the date it was sold (or the current price if it is still owned), i.e. earnings. Current income is the dividends paid by the company on its profits and the shares remain with the investor.
In calculating the TSR, an investor can only estimate the dividends that he or she received or be eligible to receive. For example, they may hold the shares on the day the dividend is paid, but only receive the dividend if they held the shares on or before the ex-dividend date. Therefore, an investor must know the stock’s prior dividend date rather than the dividend payment date when calculating the TSR.
Dividends, which are per-share distributions of a company’s earnings to certain classes of shareholders, can include share buyback programs, one-time payments, and regular quarterly or semi-annual cash payments.
TSR is very useful when measured over time because it represents the long-term value of an investment, the most accurate metric for measuring the success of most individual investors.
Total Shareholder Return (TSR) Examples
Total shareholder return is calculated as the general estimate of the stock price per share, plus dividends paid by the company, over a given measured interval; this amount is then divided by the initial purchase price of the shares to achieve the TSR.
As a mathematical equation, it would be:
RRT=(Actual Price–Purchase price)+Dividends
Purchase price
RRT =Purchase price( Current price – Purchase price ) + Dividends
A hypothetical example of TSR
For example, suppose an investor purchased 100 shares of a company at $20 per share (for a total investment of $2,000). The shares, which they still own, are now trading at $24 a share. Since the investor purchased the shares two years ago, the company has paid a total of $4.50 in dividends per share.
What is the TSR of the investor during those two years? would be calculated as
- $24 – $20 (current share price minus original purchase price) = 4
- plus $4.50 (amount of dividends per share received) = 8.5
- Shared at $20 (original purchase price per share) = .425
- multiply by 100 to get a percentage = 42.5%
So the TSR would be 42.5%. As an equation:
RRT= ( ( PS 2 4-PS 2 0 ) + PS 4 . 5 0 ) ÷ PS 2 0= 0 . 4 2 5 × 1 0 0= 4 2 . 5 %
Note: If you prefer to think of TSR in dollars in percentage terms, you only need to follow the first two steps above, taking $8.50 per share as your total shareholder return, also known as the “cash return value of the shares”, as it is called in it. in this way.
A real-life example of TSR
For the fiscal year 2020, Microsoft Corporation (MSFT) had a TSR of 59.4% for investors who held it throughout that period. Of this, 57.6% came from an increase in the share price, while 1.8% was returned from dividends.
TSR can also be thought of as the internal rate of return (IRR) of all cash flows to an investor during the period in which they hold their shares.
Advantages and Disadvantages of Total Shareholder Return (TSR)
TSR is best used when analyzing venture capital and private equity investments. These investments typically involve multiple cash investments over the life of the business and ultimately individual cash outflows through an initial public offering (IPO) or sale.
Because TSR is expressed as a percentage, the figure is easily comparable to industry benchmarks or companies in the same sector. However, it reflects past overall returns to shareholders without considering future returns.
TSR presents an easy-to-understand figure of the overall financial benefits generated for shareholders. The figure measures how the market assesses a company’s overall performance over a given period. However, the TSR is calculated for listed companies at the general level, not at the division level. Also, TSR only works for investments with one or more cash inflows after purchase. Additionally, TSR is outward-facing and reflects the market’s outlook on performance; therefore, a TSR may be negatively affected if a fundamentally strong company’s share price suffers sharply in the short term for any reason, such as negative publicity or distinctive stock market behavior or sentiment.
TSR does not measure the total amount of the investment or its performance. For this reason, TSR may favor investments with high rates of return, even when the dollar amount of return is small. For example, a $1 investment that returns $3 has a higher TSR than a $1 million investment that returns $2 million. Also, TSR cannot be used when the investment generates interim cash flows. Additionally, TSR does not take into account the cost of capital and cannot compare investments over different periods.
Prons
- Simple to calculate, easy to understand
- A more complete evaluation of the value of the investment.
- Easy to compare with other companies or benchmarks
- A good measure of long-term performance
Cons
- Limited to past performance, no sense of future returns
- Cash only for investments with cash inflows
- Sensitive to stock market sentiment
- Does not reflect the amount of investment
Total Shareholder Return FAQs
What is the total shareholder return?
Total Shareholder Return (TSR) is one way of evaluating investment performance. It includes capital gains and dividends to measure the overall returns an investor gets from a stock.
How is TSR measured?
TSR, short for total shareholder return, measures the appreciation in a share’s price, plus the total amount paid in dividends per share, over a given period.
How is the total shareholder return calculated?
To calculate total shareholder return (TSR), first, the current stock price per share is shown from the price originally paid. Then add the dollar amount of dividends received per share, along with any other distributions or special payments (such as share buybacks, for example). Divide this amount by the purchase price of the shares per share. Multiply by 100 to get a TSR percentage figure.
The baseline
Total Shareholder Return (TSR) is a way of finding out how much your investment has generated for you – how much extra money your capital has earned in a given period. Respect is factored into shares and dividends paid on those shares. It has its limits, what financial metrics do not have them? – But overall, it provides a more complete understanding of your stock’s performance than taking the profit on the stock price.
