What Is Total Shareholder Return (TSR)?
Total Shareholder Return (TSR) is a vital financial performance metric that reveals the total returns an investor gains from an investment, specifically in equities or shares of stock. Expressed as a percentage, TSR encompasses both capital gains and dividends, and may also consider special distributions, stock splits, and warrants. Essentially, TSR represents the cumulative returns achieved from a stock over a stated period.
Key Takeaways
- Comprehensive Metric: Total Shareholder Return (TSR) includes capital gains and dividends, offering a holistic view of the returns from an investment in stock.
- Calculates Return Efficiently: The straightforward formula for TSR is { (Current Price - Purchase Price) + Dividends } ÷ Purchase Price.
- Evaluates Long-Term Value: TSR provides an intuitive measure of the financial benefits received by stockholders, making it a reliable gauge of an investment’s long-term value.
- Surpasses Simple Metrics: By integrating multiple facets of return, such as price appreciation and dividends, TSR offers a more thorough assessment compared to metrics like stock price changes alone.
Deep-Dive into Total Shareholder Return (TSR)
Investors profit from stock primarily through two channels: capital gains and current dividends. A capital gain corresponds to the increase in a stock’s market price from the purchase date to the sale date – a straightforward profit realisation. Conversely, dividends represent periodic income distributed by the company from its earnings while the investor holds the stock.
When computing TSR, dividends factored in must be actually received by the investor, which depend on the stock’s ex-dividend date rather than the dividend payment date.
Dividends cover a spectrum from regular quarterly payouts to special one-time payments, including stock buyback programs. Hence, TSR captures both recurring and extraordinary distributions to paint a comprehensive picture of returns over time.
How to Calculate TSR
TSR is quantified by adding up the appreciation in a stock’s price along with any dividends received, divided by the initial stock purchase price.
TSR = \frac { (\text{Current Price} - \text{Purchase Price}) + \text{Dividends} }{ \text{Purchase Price} }
Illustrative Example of TSR Calculation
Let’s say an investor purchased 100 shares of stock at $20 per share, a total investment of $2,000. Now, the stock trades at $24 per share, and over two years, it paid out $4.50 in dividends per share. The TSR in this scenario would be calculated as:
- $24 - $20 (current price - initial price) = 4
- plus $4.50 (total dividends received) = 8.5
- divided by $20 (initial purchase price) = 0.425
- multiplied by 100 to express as a percentage = 42.5%
Thus, TSR = 42.5%. In monetary terms, TSR per share here would be $8.50.
Real-Life TSR Example: Microsoft Corporation
In fiscal year 2020, Microsoft Corporation (MSFT) achieved a remarkable TSR of 59.4%. This included 57.6% from share price increase and 1.8% from dividends, illustrating the value TSR can bring in understanding comprehensive investment gains.
Advantages and Limitations of Total Shareholder Return (TSR)
Pro
- Simplicity: Easy to calculate and understand.
- Holistic Representation: Combines capital gains and dividend returns for a complete evaluation.
- Benchmarking Tool: Allows comparable analysis against industry standards and similar companies.
- Long-term Insight: Great for assessing long-term performance viability.
Con
- Historical Bias: Limited to past data with no predictive value for future returns.
- Investment Limitation: Effective only for investments producing cash inflows.
- Market Sensitivity: Susceptible to temporary market sentiments and volatilities.
- Relative Size: Reflective of return rates, but not absolute investment size.
Common Questions About TSR
What Is Total Shareholder Return?
Total Shareholder Return (TSR) enlightens investors on how effectively their investments are performing by factoring in both capital gains and dividend earnings.
How Is TSR Measured?
TSR is assessed by summing the appreciation of a stock’s price with the total dividends received per share over a specific period.
How to Calculate Total Shareholder Return?
To calculate TSR, subtract the initial purchase price from the current stock price, add the dividends or any other payouts, then divide by the original purchase price and multiply by 100 to obtain the TSR percentage.
The Bottom Line
Total Shareholder Return (TSR) offers a critical view of your investment returns, incorporating not just stock price appreciation but also dividend payouts. While it has inherent limitations, such as focusing on past performance, TSR remains a comprehensive metric to gauge an investment’s true financial return.
Related Terms: capital gains, dividends, internal rate of return, holding period, venture capital.
References
- Trefis. “Microsoft Total Shareholder Return”.
