Definition
Total Shareholder Return (TSR) is a financial performance metric that measures the overall value an investor receives from their investment in a company’s stocks. It includes capital gains and any dividends received over a certain period. The value is typically shown as a percentage, with a higher percentage indicating a better return for the investor.
Key Takeaways
- Total Shareholder Return (TSR) is a measure of the performance of different companies’ stocks and shares over time. It combines share price appreciation and dividends paid to show the total return to the shareholder.
- TSR is a comprehensive measurement because it accounts for all gains and losses, which include capital gains and dividends. Therefore, it gives a more accurate depiction of overall investment return.
- This metric is crucial for investors as it helps them to compare the performance of different companies and make informed investment decisions. However, TSR does not provide insight into a company’s future prospects or operational efficiency.
Importance
Total Shareholder Return (TSR) is a crucial financial term that measures the overall return on an investment to a shareholder for holding a particular stock.
It is significant because it gives a comprehensive picture of the actual performance and return on investment, as it takes into account capital gains, dividends, or any other distributions realized over a specific period.
By calculating TSR, shareholders and potential investors can accurately assess an investment’s profitability or compare the relative performance of different companies within the same industry.
Therefore, TSR serves as a powerful tool in guiding investment decisions and strategies for maximum shareholder value.
Explanation
Total Shareholder Return (TSR) is a performance metric primarily used by investors, financial analysts, and corporations to assess the overall performance of a company’s stock from an investor’s perspective. Its purpose is to reflect the total gains generated from an investment, considering both the capital appreciation and dividends received.
This makes TSR a crucial evaluation tool, as it combines the aspects of capital gains with dividends, painting a more holistic picture of returns for investors compared to solely looking at price appreciation. Moreover, Total Shareholder Return is used to compare the performance of different companies in the same industry, size, or category.
It helps in identifying firms that are producing substantial returns for their shareholders. Furthermore, TSR also plays an integral role in executive compensation plans.
It helps link remuneration with the company’s performance, driving the decision-making process toward value creation for shareholders. As such, the use of TSR promotes alignment between the interests of the shareholders and those of the company’s management.
Examples of Total Shareholder Return
Example 1: Microsoft Corporation As of 2021, Microsoft had a strong Total Shareholder Return (TSR). If an investor bought Microsoft shares worth $1000 in 2016, the investment would have grown to approximately $3,600 in five years. This growth includes appreciation in share price as well as dividends they paid annually.
Example 2: General Electric Co. General Electric (GE) is a case where Total Shareholder Return was negative over a period of time. Those who bought GE shares for $1000 at the beginning of 2017 had their investment value decreased to roughly $570 by the end of
This decrease in value was due to a fall in the share price as the company struggled with numerous operational and financial challenges.
Example 3: Amazon Inc Amazon has been well-known for its high TSR for several years. For example, if someone bought Amazon shares worth $1000 in 2011, their investment would have grown to approximately $20,000 by
This return did not include dividends, as Amazon reinvests its profits in the company instead of distributing dividends to its shareholders.
Total Shareholder Return FAQs
What is Total Shareholder Return (TSR)?
Total Shareholder Return (TSR) is a measure of the performance of different companies’ stocks and shares over time. It combines share price appreciation and dividends paid to show the total return to the shareholder expressed as an annualized percentage.
How is Total Shareholder Return calculated?
TSR is calculated by taking the summation of capital gains and dividends, dividing by the initial investment, and then converting that number into a percentage. The formula is: (change in stock price + dividends) / initial stock price * 100%.
Why is Total Shareholder Return important?
TSR is important because it provides a comprehensive picture of the returns a company is generating for its shareholders. It takes into account both capital gains and income from dividends, which are equally important components of shareholder return.
How does Total Shareholder Return compare to other financial metrics?
Unlike metrics such as Earnings Per Share (EPS) or Price/Earnings ratio, TSR shows returns from an investor perspective, it considers the total earnings from the investment, including share price appreciation and dividends.
What are the limitations of Total Shareholder Return?
While TSR is a useful measure of historical performance, it does not provide predictive insights about future performance. It also does not factor in company-specific risks or market conditions that could impact future returns.
Related Entrepreneurship Terms
- Dividends
- Capital Gains
- Stock Price Appreciation
- Reinvestment of Dividends
- Equity Valuation
Sources for More Information
- Investopedia – a comprehensive resource for investing, finance, and market news. You can search for in-depth articles on Total Shareholder Return.
- Yahoo! Finance – a platform that offers financial news, data, and commentary including Total Shareholder Return, stock quotes, press releases, and financial reports.
- Morningstar – a well-respected site providing investment research, including analysis on Total Shareholder Return.
- Bloomberg – a global leader in business and financial data, news, and insight. The website often contains articles or news that mention or analyze Total Shareholder Return.
