Table of Contents
- What Is Total Shareholder Return (TSR)?
- Key Takeaways
- Understanding Total Shareholder Return (TSR)
- Examples of Total Shareholder Return (TSR)
- Hypothetical Example of TSR
- Real-Life Example of TSR
- Advantages and Disadvantages of Total Shareholder Return (TSR)
- What Does Total Shareholder Return Do?
- How Is TSR Measured?
- How Do You Calculate Total Shareholder Return?
- The Bottom Line
What Is Total Shareholder Return (TSR)?
Let me explain total shareholder return, or TSR, directly to you. It's the complete return you get from investing in a stock, summing up everything that stock has delivered back to you as an investor.
To calculate it, usually as a percentage, TSR includes capital gains and dividends from the stock. It can also factor in special distributions, stock splits, and warrants. This metric shows the financial performance, telling you the total amount you've reaped from your investment in equities or shares.
Key Takeaways
You need to know that TSR measures how much you receive from a stock over a specific period. It factors in capital gains and dividends to determine the total return. The formula is straightforward: [(current price - purchase price) + dividends] ÷ purchase price. TSR gives you an easily understood figure of the overall financial benefits for stockholders. Remember, it's a good gauge of long-term value, but it only looks at past performance.
Understanding Total Shareholder Return (TSR)
As an investor, you make money from stocks in two main ways: capital gains and current income. Capital gains come from the change in the stock's market price from when you bought it to when you sell it—or the current price if you still own it. That's your profit. Current income is the dividends the company pays out from its earnings while you hold the stock.
When you're calculating TSR, only count the dividends you actually received or were eligible for. For instance, you might own the stock on the dividend payable day, but you only get it if you owned it on or before the ex-dividend date. So, focus on the ex-dividend date, not the payment date, for accurate TSR.
Dividends are per-share distributions of some company earnings to stockholders, which can be one-time or regular quarterly or semiannual payments. Companies also return cash through stock buyback programs. TSR is most useful over time, showing the long-term value of your investment, which is the best metric for most individual investors like you.
Examples of Total Shareholder Return (TSR)
TSR is calculated as the overall appreciation in the stock's price per share, plus any dividends paid, during a measured interval, divided by the initial purchase price.
The equation is: TSR = [(Current Price - Purchase Price) + Dividends] / Purchase Price.
Hypothetical Example of TSR
Suppose you bought 100 shares at $20 each, totaling $2,000. The stock now trades at $24, and over two years, the company paid $4.50 in dividends per share.
Calculate it like this: $24 - $20 = $4, plus $4.50 = $8.50, divided by $20 = 0.425, times 100 = 42.5%. Your TSR is 42.5%. If you prefer dollars, it's $8.50 per share as your total return.
Real-Life Example of TSR
From 2021 to 2024, Microsoft (MSFT) had a TSR of 19.8% for holders over that period. Of that, 19.2% was from share price increase, and 0.6% from dividends. TSR can also be seen as the internal rate of return of cash flows during your holding period.
Advantages and Disadvantages of Total Shareholder Return (TSR)
TSR works best for analyzing venture capital and private equity, where investments involve multiple cash flows and end with an IPO or sale. As a percentage, it's comparable to industry benchmarks or peers, but it only shows past returns, not future ones.
It provides a clear figure of financial benefits for stockholders, measuring market evaluation of company performance. However, it's at the overall company level, not divisional, and it's externally focused, so short-term issues like negative publicity can hurt it.
TSR doesn't measure absolute investment size or return, favoring high percentage returns even if dollar amounts are small. For example, $1 returning $3 beats $1 million returning $2 million in TSR terms. It ignores cost of capital and can't compare different time periods.
Pros
- Simple to calculate, easy to understand
- More complete evaluation of investment’s worth
- Easy to compare to other companies or benchmarks
- Good gauge of long-term performance
Cons
- Limited to past performance, no sense of future returns
- Sensitive to stock market performance, like nearly any metric
- Doesn’t reflect size of investment
What Does Total Shareholder Return Do?
TSR evaluates your investment's performance by factoring in capital gains and dividends for overall returns from a stock.
How Is TSR Measured?
It measures stock price appreciation plus total dividends per share over a period.
How Do You Calculate Total Shareholder Return?
Subtract current price from purchase price, add dividends and special distributions, divide by purchase price, and multiply by 100 for the percentage.
The Bottom Line
TSR determines how much your investment has earned you in a specific period, accounting for stock appreciation and dividends. It has limitations, but it gives a fuller picture than just price gains alone.
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