Total Shareholder Return

What is Total Shareholder Return?

Total Shareholder Return (TSR) is an indicator of the performance of the stock return over a time period for which it is held. The return includes a capital appreciation of the stock as well as the dividend earned on the stock. and is expressed in percentage terms.

Total Shareholder Return Formula

Total shareholder return for a particular stock can be determined using the following formula.

TSR = Current Price – Purchase Price + Dividend / Purchase Price

Here,

  • Current Price = Price at which stock is trading currently
  • Purchase Price = Price at which stock is acquired
  • Dividend = Dividend received during the year

Thus, in order to calculate the TSR for a year, the sum of the change in stock price and the dividendDividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more received is divided by the purchase price of the stock and is expressed as a percentage.

Total Shareholder Return

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For eg:
Source: Total Shareholder Return (wallstreetmojo.com)

Example

Let us have a look at an example in order to have a better understanding of the concept.

Suppose a stock of XYZ company was purchased by the investor for $20. The current price of the stock comes out to be $25. Also, till date the investor has received a total dividend of $4.

Solution:

Calculation of total shareholder return will be –

TSR = (25 – 20 + 4 ) / 20 = 45%

The TSR for the stock comes out to be 45%.

Importance of Total Shareholder Return

Total shareholder return takes into account two components of return namely capital appreciationCapital AppreciationCapital appreciation refers to an increase in the market value of assets relative to their purchase price over a specified time period. Stocks, land, buildings, fixed assets, and other types of owned property are examples of assets.read more and dividend received on the stock since the time stock was purchased. Thus, it provides the investor with information regarding the total growth attained by the stock over a period of time. It is very easy to understand and can be used by the investor to evaluate the performance of the stock by comparing the same with other stocks of companies operating in similar industries by using the same as a benchmark. Also, based on this analysis the investor can come to a conclusion whether it is feasible to remain invested in the stock or he shall take the exit from the stock.

Advantages

  • TSR is a very useful tool for comparing the returns generated by the stock under consideration and stocks of other companies of similar industries.
  • It helps to determine the overall return that is generated by the stock on the investment done on it. It is a return that is very easy to understand and analyze.
  • It helps an investor to understand how well the stock is performing.

Disadvantages

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