# Total Shareholder Return - Explained

What is Total Shareholder Return?

# 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.