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.
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 dividend received is divided by the purchase price of the stock and is expressed as a percentage.
Example
Let us have a look at an example in order to have a better understanding of the concept.
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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 appreciation 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
- It is to be noted that TSR takes into account the return generated by the stock in the past. But it does not consider the return that is expected to be achieved on the stock in the coming future.
- TSR is calculated in case of publicly traded companies, not at a divisional or individual level, but on an overall level.
- It can be calculated only for those investments where there are one or more cash flows after the stock is purchased.
- It is based on the market price of a stock, which may be affected by many external factors, especially in the short term.
- It does not determine the exact size of the investment or the return that is generated on the stock. Accordingly, it may be possible that total shareholder return shows a stock with higher returns to be favorable, though the absolute amount of return in figures may be very less.
- The concept of TSR does not account for the cost of capital and it is for this reason that it is not possible to compare the returns for different time periods.
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