Definition
Total Shareholder Return (TSR) is a financial metric that represents the total return of a stock to an investor, including the capital appreciation and dividends. It is calculated by taking the change in the stock’s price, adding dividends paid and then dividing by the initial price of the stock. It’s often presented as a percentage and serves as an effective comparison tool of companies’ performance in terms of shareholder value.
Phonetic
Total Shareholder Return (TSR) would be phonetically transcribed as /’toʊtl ˈʃerˌhoʊldər rɪˈtɜrn/.
Key Takeaways
<ol><li>Total Shareholder Return (TSR) is a performance metric that combines share price appreciate and dividends to indicate the total return to the shareholder expressed as a percentage. It provides a thorough overview of the company’s efficiency in rewarding its shareholders.</li><li>TSR is a valuable tool for comparing the performance of different companies over a chosen period of time. It can be used by investors to make more informed investment decisions by considering the company’s past and projected total return.</li><li>Sometimes, TSR may not reflect the real picture of a company’s financial health. A high TSR may come from temporary factors such as a speculative price bubble while a low TSR may not necessarily indicate a poor-performing company since it might be in a growth phase with its profits reinvested into the business rather than distributed as dividends. Thus, it should be used in conjunction with other measures like Earnings Per Share (EPS), Return on Equity (ROE), and others.</li></ol>
Importance
Total Shareholder Return (TSR) is a crucial metric in business and finance because it provides a comprehensive picture of the overall performance and value generated by a company for its shareholders. It takes into account both capital gains (increase in share price) and dividends paid to shareholders, offering a complete view of investment return. Hence, it is typically used by investors, analysts, and company management to assess the company’s profitability and success in generating shareholder value. A high TSR can indicate strong management and profitable business strategies, whereas a low TSR can flag potential issues. It also serves as a comparative tool against peers and market indexes to evaluate the relative performance of a company in the market. The attention to TSR encourages companies to focus on long-term, sustainable growth that benefits their shareholders.
Explanation
Total Shareholder Return (TSR) serves as a significant metric in business and is commonly used to compare the performance of different companies. TSR puts into account all the direct and indirect benefits that shareholders receive during a specific period which encompasses change in share price and dividends. It is an inclusive measure of returns, and investors utilize it to gauge the total return on their investment. This is essential because it helps consider all sources of incremental wealth, rather than focusing only on price appreciation.Businesses and investors use TSR in various analytical ways, primarily for performance evaluation and comparison. Businesses often use TSR in setting executive remuneration packages and benchmarking their performance against industry peers. On the other hand, investors use TSR to identify and choose companies that offer the highest return on investment. It provides them with a more detailed and comprehensive picture of the returns they would receive, which, when compared with the return from other investments, assists in making a more informed investment decision.
Examples
1. Microsoft Corporation: Annual TSR for Microsoft was about 40% from the period June 2020 – June 2021. This included both share price appreciation and dividends distributed to shareholders over the period.2. Apple Inc: For Apple, the TSR for the year 2020 was roughly 80%. This exceptional figure was the result of a significant increase in Apple’s share price throughout the year, combined with the dividends that the company paid out.3. Exxon Mobil Corporation: Due to a difficult market environment, the TSR for Exxon Mobil was negative in 2020, at about -36%. This figure incorporates both a decline in share price and the dividends that Exxon Mobil paid out that year.
Frequently Asked Questions(FAQ)
What is Total Shareholder Return (TSR)?
Total Shareholder Return (TSR) is a performance metric that captures the economic gain or loss experienced by a shareholder from owning and holding a company’s stock over a specific period. This approach combines the capital gain from rising stock prices and the return from dividends, including the reinvestment of these dividends.
How is Total Shareholder Return (TSR) calculated?
TSR is calculated by comparing the total value a shareholder receives (share price appreciation plus dividends) at the end of the period with the initial investment, typically represented as an annualized percentage. TSR = ( (Ending stock price + Dividends) – Initial Stock Price)/ Initial Stock Price.
Why is Total Shareholder Return (TSR) used?
TSR is used as a comprehensive measure of the company’s performance from the investor’s point of view. It shows whether and by how much the company created wealth for its shareholders. It is a key statistic to compare companies within sectors and across industries.
Can Total Shareholder Return (TSR) be negative?
Yes, TSR can be negative. A negative TSR reflects that an investor would have lost money over the period under study. This can happen because of depreciation of the stock price or if the loss from the decrease in the stock price is greater than the gain from received dividends.
How does Total Shareholder Return (TSR) differ from stock price appreciation?
Stock price appreciation only takes into account the rise in a company’s stock price, while TSR also includes dividends paid to shareholders as part of the total returns. Thus, TSR is a more comprehensive measure of shareholder returns.
What factors influence Total Shareholder Return (TSR)?
Factors influencing TSR can include fundamental business performance, dividends paid, changes in the overall stock market or sector valuations, stock buybacks, and any other capital allocations decisions made by the company.
Is it possible for a company’s TSR to differ significantly from its financial results or business performance?
Yes, because TSR is influenced by stock market dynamics and sentiment, which can sometimes diverge from a company’s underlying health or performance. For example, a company’s stock can be bid up in a bullish market irrespective of its actual profits or growth. Conversely, even financially strong firms can see their stocks undersell during a market downturn.
Related Finance Terms
- Dividend Yield
- Capital Gain
- Equity Shares
- Stock Price Appreciation
- Dividend Reinvestment
Sources for More Information
