What is Total Shareholder Return?

In simple terms, total shareholder return (or, TSR) is the total amount returned by an investment to the investor. TSR is a common performance metric employed by financial analysts and is expressed as an annualized percentage of the sum total of capital gains and dividends returned to the investor. As such, total shareholder return can also be considered an internal rate of return (IRR) of positive cash flows for the duration of the investment.

How is Total Shareholder Return Determined?

The return from any stock investment consists of two main components

1. Capital gains, which is the difference of the current stock price and its purchase price.
2. Dividends, which include cash payments received by the investor from the company, proceeds from stock buyback programs and one-time or recurrent payouts.

Total shareholder return (TSR) is calculated as follows: TSR = (Capital gains + Dividends) / Purchase price, where purchase price is the price paid by the investor when acquiring the stock. For example, an investor buys 100 shares of a stock at the rate of $10 per share. His total investment would be $10 x 100 = $1000. Let us assume that the investor has chosen to hold onto this stock for the long term. For a measured interval I1, the company has paid out a total dividend of $2 per share, while the share price appreciated to $12. Therefore, TSR for the period I1 can be calculated as: TSR = {($12 - $10) +$2} / $10 = 0.4 = 40%. It is important to note when calculating total shareholder return that such a calculation only considers those dividends that have been paid during the period of ownership of the stock. As such, the stocks ex-dividend date is of vital consequence to the calculation of TSR. For companies that contribute to the index of any stock market, the TSR is also referred to as the total return index. As documented in the Boston Commercial Group report of December 2014, in certain industry sectors such as technology, large-cap companies have consistently demonstrated much lower TSR performance figures compared to their small-cap counterparts. However, once portfolio diversity is factored into the equation, the difference between the TSR performance of large-cap and small-cap businesses becomes inconsequential. As such, it can be concluded that with an increase in the portfolio diversity of any company, it becomes increasingly difficult to achieve higher TSR performance.

Advantages and Disadvantages of Total Shareholder Return (TSR)

An important utility of TSR is to analyze venture capital and private equity investments. These types of investments share common characteristics such as

• A multitude of cash investments over the entire life cycle of the business.
• A single outflow of cash at the end of the business life cycle brought about by a sale or a public offering such as an IPO.

The representation of the total shareholder return as a percentage makes it a convenient tool for performance comparisons with segment benchmarks and competitors. At the same time, the lack of scope for evaluation of future returns means that TSR is limited to expressing the past performance of a stock. TSR is highly valued as a performance metric because of the relative simplicity in the methodology that it applies to evaluate the overall financial benefits availed by the stockholders over a given period of time. This, in turn, offers a clear perspective of the financial performance of the company over the same period. On the downside, TSR fails to evaluate company performance at a divisional level. Moreover, such a procedure is only applicable to those investments that involve one or more cash inflows after purchase. Also, since TSR performance metrics are highly dependent on market perception, any volatility (even in the short term) in share prices of the publicly traded company can negatively affect its TSR figures. Another limitation of total shareholder return is that it disregards the total size of both the investment as well as its return. This often leads to situations where TSR endorses investments with typically high return rates while completely ignoring the actual dollar value of the return. Besides, TSR is incompatible with investments that involve interim cash flows and, as such, are unsuitable for generating interim statements. Also, since TSR only evaluates stock performance over a single, discrete time period, it is not possible to compare performance of investments over different time period using such a procedure. Lastly, the use of TSR as an incentive does not offer the executive team any remedial measures that they can employ to enhance employee performance in order to obtain stronger TSR figures.

Related Topics

• Trend Analysis of Financial Statements
• Common-Size Analysis (Vertical Analysis) of Financial Statements
• Common-Size Financial Statement
• Net Dollar Retention
• Horizontal Analysis
• Per Share Basis
• Profitability Ratios
• Gross Margin Ratio
• Profit Margin
• After Tax Profit Margin
• Return on Assets
• Total Shareholder Return
• Cash on Cash Return
• Earnings Per Share
• Diluted Earnings Per Share
• Asset Turnover Ratio
• Berry Ratio
• Break-Even Analysis
• Liquidity Ratio
• Current ratio  (Working Capital Ratio)
• Working Ratio
• Quick Ratio
• Quick Assets
• Days Sales Outstanding
• Cash Ratio (Operating Cash Flow Ratio)
• Receivables turnover ratio (often converted to average collection period)
• Accounts Payable Turnover Ratio
• Inventory turnover ratio (often converted to average sale period)
• Solvency (Coverage Ratios)
• Leverage Ratio (Debt Ratio)
• Asset Coverage Ratio
• Debt to Equity
• Debt to Income Ratio
• Debt Coverage Ratio
• Times Interest Earned
• Market Capitalization
• Price to Equity Ratio
• Book-To-Market Ratio
• Price to Earnings Ratio
• Price to Earnings Growth (PEG) Ratio
• Price to Earnings Growth Payback Ratio
• CAPE Ratio
• Price to Cash Flow Ratio
• Capital Maintenance
• Book to Bill Ratio
• Asset Turnover Ratio
• Plowback Ratio 
• Days Inventory Outstanding
• Days Payable Outstanding
• Days Sales Outstanding
• Non-financial Performance Measures: The Balance Scorecard