Total shareholder return definition
Total shareholder return meaning
Total shareholder return (TSR) measures the return that an investor has made from holding stock. TSR is incorporating the return earned from the difference between the sale price and purchase price, plus additional income.
If you try to calculate a stock return based solely on the capital gains it will not provide real value because there may also be dividends received during the holding. Therefore, to get a valid measure you should consider all profits made and payments received.
What is total shareholder return?
The total shareholder return is measured in accordance with the cash flow received by the investors. The estimation includes only the dividends received by the investors and possible capital gains. It should not be based on the total dividends paid out by the company, because the investor may have bought the stock after the dividend payout date. The way in which total shareholder return can be calculated is:
TSR = ((sale price – purchase price) + dividends received) / purchase price; or
TSR – (capital gains + dividends) / purchase price
For example, an investor buys shares for a total value of €500. During the holding period, the company has paid out four dividends with a total value of €5. The share value has increased, and they were sold for €540. The total return can be calculated as follows:
TSR = ((540-500) + 5) / 500 = 0.09 or 9 per cent
According to the example, the investor has made a total return of 9 per cent from the appreciation of stock price and dividends received during the holding period.
Total shareholder return is commonly used when measuring the return from venture capital and stock investments. It is particularly useful when the investment is generating several cash flows. This measure is also used for comparing the value created by executives of different companies for the shareholders.