Total shareholder return (TSR) (or simply total return) is a
measure
Measure may refer to:
* Measurement, the assignment of a number to a characteristic of an object or event
Law
* Ballot measure, proposed legislation in the United States
* Church of England Measure, legislation of the Church of England
* Mea ...
of the performance of different companies'
stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
s and
shares
In financial markets, a share is a unit of equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers to all of the shares of an ...
over time. It combines
share price
A share price is the price of a single share of a number of saleable equity shares of a company.
In layman's terms, the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for.
B ...
appreciation and
dividends
A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-in ...
paid to show the total return to the
shareholder
A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal own ...
expressed as an annualized percentage. It is calculated by the growth in capital from purchasing a share in the company assuming that the dividends are
reinvested each time they are paid. This growth is expressed as a percentage as the
compound annual growth rate
Compound annual growth rate (CAGR) is a business and investing specific term for the geometric progression ratio that provides a constant rate of return over the time period. CAGR is not an accounting term, but it is often used to describe some ele ...
.
The main benefit of TSR is that it allows the performance of shares to be compared even though some of the shares may have a high growth and low dividends and others may have low growth and high dividends.
Most
stock market indices
In finance, a stock index, or stock market index, is an index that measures a stock market, or a subset of the stock market, that helps investors compare current stock price levels with past prices to calculate market performance.
Two of the ...
only use the growth of the prices of the companies making up the index. However, when they use TSR for the companies it is called a
total return index A total return index is an index that measures the performance of a group of components by assuming that all cash distributions are reinvested, in addition to tracking the components' price movements. or accumulation index. For example, corresponding to the
S&P 500
The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of D ...
index calculated by
Standard and Poor's
S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities. S&P is consi ...
, there is the S&P 500 TR index.
In the technology sector, a study has found that regardless of a company's size, the more diverse the portfolio, the more difficult it is to generate high TSR.
In practice TSR is difficult to calculate since it involves knowing the price of the shares at the time the dividends are paid. However, as an approximation over one year it can be calculated as follows with:
= share price at beginning of year,
= share price at end of year,
''Dividends'' = dividends paid over year and
''TSR'' = total shareholder return, TSR is computed as
References
Stock market
Shareholders
Yield (finance)
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