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Total Shareholder Return – Definition

Total Shareholder Return Definition

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.

A Little More on What is the Total Shareholder Return

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 stock’s 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.

References for Total Shareholder Return

Academic Research on Total Shareholder Return (TSR)

Total Shareholder Return (TSR) and Management Performance: A Performance Metric Appropriately Used, or Mostly Abused?, Burgman, R. J., & Van Clieaf, M. (2012). This paper scrutinizes the complexities associated with using total shareholder return (TSR) as a means to measure gains or losses in shareholder wealth and also as a frame of reference for long-term incentive compensation and proxy voting by shareholders. The authors contend that such usage of the TSR was, for the most part, unconsidered. The paper concludes that the quality of TSR can be accurately interpreted by introducing various metrics such as economic profit (EP), return on invested capital (ROIC), and future value (FV).

Association of Total Shareholder Return with other value based measures of financial performance, Pandya, B. (2014). Journal of Entrepreneurship, Business and Economics, 2(2), 26-44. This paper scrutinizes the correlation of total shareholder return (TSR) with various other metrics such as created shareholder value (CSV), market value added (MVA), and economic profit (EP) in the context of the Indian banking system. The author provides empirical evidence to support his findings. The paper samples a total of 21 publicly listed Indian banks (10 public sector banks and 11 private banking institutions) over two discrete time periods (2000 – 2001 and 2009 – 2010) and employs pooled ordinary least square regression to analyze the correlation between the pertinent variables. The study reveals that created shareholder value, together with market value added and economic profit are able to explain the variations of total shareholder value in Indian banks.

Share-Based Payment Valuation Relative Total Shareholder Return Plan, Montgomery, G. L., & Straja, S. R. (2010). Montgomery Investment Technology, 1(1), 1-7. This paper evaluates the following benefits that can be derived from total shareholder return (TSR) plans vis-à-vis aligning executive compensation with shareholders’ objectives in ways that retain and motivate the leadership team: Motivating executives as well as employees to adopt strategies that focus on the overall success of the company.  Ensuring payment of equitable compensation to executives and employees to achieve the requisite performance goals in order to build credibility with shareholders. Optimizing return on reward investment.

Total Shareholder Return (TSR): As a Performance Measure, Sharma, R. (2013). TRANS Asian Journal of Marketing & Management Research, 2(7), 80-86. This article scrutinizes the role played by Total Shareholder Return (TSR) as a performance metric in a company. The author evaluates the growth of TSR during a particular of time and makes the following observations with respect to corporate performance: A positive growth of total shareholder return signifies good corporate performance. Conversely, a negative TSR growth signifies poor corporate performance.  The author computes TSR by using market capitalization and dividend. She samples performance data of 450 companies over a five -year period from 2001 to 2005. The paper concludes that two factors – dividend and expansion in market capitalization influence the ways in which shares can be enriched. Total shareholder return considers the sum of these two factors.

How Companies Use Total Shareholder Return as the Measurement for Compensation Programs, Edwards, L. (1994). Compensation & Benefits Review, 26(6), 57-63. This paper scrutinizes the methodology of employing total shareholder return (TSR) as a performance metric to formulate a system of compensation to reward company executives. This system encourages managers to adopt the shareholder psyche in order to focus on the rudimentary factors that drive shareholder value.

Restricted stock: the case for total shareholder return; Companies that adopt market-based and performance-based vesting conditions under FAS 123 (R) can better …, Abrams, D., Cohen, A., & Suzman, P. (2006). Financial Executive, 22(10), 44-48. Companies that adopted FAS 123(R) either opted for exclusive usage of restricted shares or a combination that involved usage of restricted shares as well as stock options. This was a clever move by companies to improve equity plans. U.S. businesses have begun to comprehend the inherent advantages of market-based rewards over performance-based awards. This, the author contends, allows such businesses to reward high-value employees without increasing accounting costs.

Impact of corporate governance on firm performance and total shareholder return of german listed companies, Michelberger, K. J. (2017). This paper aims to scrutinize the relationship between the vital components of the German Corporate Governance System and the performance of publicly listed German companies. The motive is to discover elements with positive and negative outcomes on firm performance and total shareholder return. The author bases his research on pertinent literature, a scientific investigation of previous studies, and empirical evidence from quantitative analyses and qualitative surveys.

Total Shareholder Return and Excess Return: An Analysis of NIFTY Pharma Index Companies, Pandya, B. (2017). BVIMSR’s Journal of Management Research, 9(2), 148-156. The aim of this article is to scrutinize the total shareholder return and excess return of those pharmaceutical companies that form part of the NIFTY pharma index of the National Stock Exchange of India (NSE). The author evaluates the correlation of total shareholder return (TSR) and excess return with accounting measures. The paper samples 10 companies included in the NIFTY pharma index over a seven year period from 2010 to 2016 and analyzes their financial data obtained from the database of Centre for Monitoring Indian Economy (CMIE). Besides, the author also obtains data about the risk free rates from the website of the Reserve Bank of India. The paper concludes that on an average, pharmaceutical companies have generated positive TSR as well as excess return, thus significantly benefiting shareholders.

Relationship Between Return on Equity, Total Shareholder Return, and CEO Compensation, Huo, K. (2018). This paper highlights the resentment of shareholders as well as the general public regarding the unabated increase in the compensation of Chief executive officers (CEOs) notwithstanding economic downturns. This negative attitude of the public towards executive compensation stems from its failure to comprehend the correlation between firm performance and CEO compensation. The author states that maintaining such a correlation is vital to safeguarding the interests of both management as well as shareholders

•    Growing through acquisitions: the long-term effects of total shareholder return of companies listed on the Johannesburg Stock Exchange, Snyders, T. (2017). (Doctoral dissertation, University of Pretoria). This study samples companies listed in the Johannesburg Stock Exchange that have been growing through acquisitions during the period 2007 – 2016 in order to scrutinize if such businesses have demonstrated better total shareholder returns (TSR) figures than companies employing organic or mixed growth strategies. Analysis reveals that mergers and acquisitions (M&A) events ultimately lead to value destruction of businesses. On the other hand, there exists a lot of ambiguity in comparative growth strategy studies.


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