How do you calculate Total Shareholder Return (TSR)?

Friday, Aug 17 2012 by
How do you calculate Total Shareholder Return TSR

One of the recent feature requests we've had as part of Stockopedia Premium is to provide Total Shareholder Return charts over different timeframes - that got us to thinking a bit more about TSR and why it's useful. What's interesting is that you don't see TSR on that many data websites (for stocks, at least - funds is a different story) but you can usually find it on individual company websites, not least because it's a big element in management compensation packages! According to Management Today,  in the majority of FTSE 100 companies,  performance against this measure is now used as the basis for calculating the major component of directors’ bonuses.

What is Total Shareholder Return?

Share-price based measures like relative strength are all very well but, when assessing stock market investments, it’s important not to fall into the trap of just looking purely at share price movements, while ignoring the value of dividend income. Total shareholder return (TSR) is intended to be he ultimate bottom line of investment performance. It measures the full returns earned by an investment over the period of ownership, including any dividend cashflows paid during that period. In essence, total shareholder return is the internal rate of return (IRR) of all cash flows paid to investors during a particular period.  

Over a short time-frame, a company’s TSR may not mean all that much but, over the long-term, it is arguably the single best indicator of comparative investment success because it reflects how well a company has created value for shareholders in highly competitive capital, labor, and product markets. That said, the fact that actual equity returns are usually below the theoretical TSR highlights one of the most significant advantages and risks associated with investing strategies – namely, the gains from the power of compounding, once described as the eighth wonder of the world by Warren Buffett, and the related risk of not reinvesting your dividends.

How do you calculate TSR?

In its simplest form, TSR has two components, the price appreciation rate (i.e. End Share Price - Opening Share Price / Opening Share Price) and the dividend yield (Sum of Dividends per Share / Opening Share Price).  As an example, let’s imagine that a shareholder in Company X invests £1.5 at time t, and at time t + 1 the share is worth £2, while the sum of annual dividends over…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>

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10 Comments on this Article show/hide all

siestainvestor 19th Aug '12 1 of 10

TSR has a flaw - particularly if it is used for directors' compensation. A cynical director would borrow against the company's assets and cash flow to fund a share buy back or a special dividend. This would enhance the TSR for the compensation period. In the long term this is punishing for the balance sheet.

If Stockopedia is to compute this for all companies then it should go the extra mile and compute TSRA (adjusted) by netting from TSR per share the net increase in debt per share. This would reward management for balance sheet improvements and also make the hurdle for the company's capital and project expenditure more likely to be earnings enhancing.

One might argue that with low interest rates, gearing is less salient. But as the most politically feasible way for soveriegns to reduce borrowing is by printing and inflation, company gearing and use of capital will affect TSR dramatically. Unfortunately this will be in the medium term - i.e after the directors have been paid out for borrowing and distributing.

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Murakami 19th Aug '12 2 of 10

In reply to post #67606

Great comment, Siestainvestor. Exactly the kind of comment I was hoping for - something we hadn't really considered which has made us all go "hmmm....".

I am not sure how much, in practice, borrowing to fund buybacks goes on (anyone have experience of this?) although I could well believe it does, given the prevalence of TSR-based compensation plans.

As a matter of principle, it makes sense that we should catch this and it should be possible for us to do so in the calculation, so we'll aim to factor this in. Much appreciated!

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siestainvestor 19th Aug '12 3 of 10

In reply to post #67610

I am not sure how much, in practice, borrowing to fund buybacks goes on (anyone have experience of this?)

Two examples (there must be more):

In 2011, SSE (Scottish and Southern Electricity) paid £629m in dividends.  In the same period they drew down £1014m in new borrowings and repaid £393m of old borrowings (net £631m). In other words, dividends were funded entirely by borrowing but TSR would ignore this.

In early 2011, Dignity (the funeral company) bought in shares and issued a huge special dividend which was funded entirely by (very) long term debt.

Now both of these businesses have predictable cash flows so some leverage is legitimate. In the case of SSE one might wonder whether it was better to borrow for capital projects rather than to pay dividends (but I don't want to go off topic on a rant about the stupidity of wind farms).  In the case of DTY, one could argue that replacing accumulated equity with 25 year debt was sensible for shareholders but rewarding management with a bonanza bonus for this is very dubious.

My point was merely that TSR is the not a "total" answer on what is good for shareholders.  A lot will depend on one's time horizon and one's attitude to risk.  I always look at the balance sheet first, then the competitive strength of the business in its market and finally at how well the management are doing in delivering earnings.


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AliceS 20th Dec '12 4 of 10

Isn't Total Shareholder Return the defining measurement of investment success? I guess it is kind of like driving by looking in the rear view mirror. Looking at a company's past shareholder return doesn't give you any visibility or insight into what the future return will be. If a company's share price has surged in recent years and become over priced it will have a great shareholder return figure and this could look attractive even though there is a big chance of a correction or protracted stagnation in share price and dividend yields have probably been reduced also. However it is also possible for a good company that has been growing steadily and whose share price has not surged yet to show a poor figure which would make the company look unattractive, however this company probably is due for solid gains and dividend yields are probably higher.

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mmbrooks123 4th Apr '15 5 of 10

In reply to post #67610

So has there been any progress in including TSR calculations on Stockopedia, and does/will this include US stocks? MMB

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julianep 26th Aug '15 6 of 10

The wait for total shareholder return seems to be a long one. I'm keeping my FT Portfolio running, because that does show it if in a slightly clunky, but free with the FT subscription way

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Edward Croft 26th Aug '15 7 of 10

In reply to post #105409

Julian - we've invested in a global dividend database at great expense this year. We've now got the data to do total returns, but it's going to be early 2016 before it's factored into the rest of our site areas and portfolio valuations. We'll be automating dividend allocations in portfolios in 2016, as well as automating splits and hopefully other corporate actions. So stay tuned - these things do take time - especially when you are aiming for full global coverage. Investors are very demanding these days !

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cig 27th Aug '15 8 of 10

In reply to post #67606

That issue is not linked with the total return calculation as such, a company that never pays dividends can also take on debt to make the equity seem more valuable, funding share buybacks or participations in leveraged vehicles for instance.

So I think it's 2 separate problems: computing total returns normalises all forms of cash flow between shareholders and company to make them comparable, then once you have total returns for everyone, you can compute a risk-adjusted version (or several, there's no unique solution to that problem) by incorporating leverage.

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MH1 18th Mar 10 of 10

I would have 2 measures of shareholder return.
1. Assumes that all dividends are reinvested.
2. That no dividends are reinvested.

This would allow investors to get a sense of the relative payoffs between the two but also allow them to more honestly appraise their own likely behaviour.

As for dividends or buybacks being funded by debt which is a very valid point that might ultimately impact the company. This should be captured in the debt profile over time, level of dividend cover. Ideally we could chart these too perhaps in the same chart as 2 or 3 separate lines.

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