What is TSR?

Total Shareholder Return uses past performance to evaluate an investment's value; it tells us the overall financial benefit gained by a company’s shareholders over a given period. TSR includes two main components: capital gains from stock price appreciation and income from dividends.  

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\[TSR = {(\text{Current Stock Price} - \text{Purchase Price}) + \text{Dividends}\over \text{Purchase Price}} \times 100 .\]

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Stock Price

Investors enter the stock market with the hopes that their investments will appreciate in value and generate profits over time. The price of a stock reflects the market’s perception of a company’s business performance. Investor expectations are based on a combination of factors. Some factors are company-specific, such as revenue and sales growth, operating profit margins, and investments. Others are external factors like economic growth in a country or industry, inflation, and the cost of capital.  

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In the short term, these internal and external factors influence investor sentiment and ultimately determine stock prices. In the long term, business performance determines the stock price. Appreciation in stock price is based on growth in a company’s earnings per share — that is, a company's net income growth and any changes in the number of shares outstanding.

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Increases in stock price over time result in capital gains for investors. A capital gain is the profit an investor receives from changes in the stock price during the time it is purchased to the date it is sold (or current price if the investor still holds the stock).  

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Dividends

About one-third of public companies in the U.S. pay dividends to investors. Dividends are used to reward investors for holding stock in a company; they represent a portion of a company's profits paid to investors while the investor owns stock in the company. Dividends can be paid in cash, stock, or some other property. They can be one-time payments or instead be regular quarterly or semi-annual cash payouts. Companies also use share buybacks to return cash to shareholders.

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Calculating TSR

TSR is the profit rate that investors earn if they reinvest all of their dividends into more shares of the stock during their holding period. To calculate TSR, use the stock price at the beginning and end of a given period and dividends paid during the same period.

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For example, one year ago an investor bought 100 shares of a company's stock at $25 per share (for a total investment of $2,500). The stock, which they still own, is now trading at $30 per share. Every year, the company pays out a total of $4.50 in dividends per share.

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The calculation of the investor's TSR over the one-year period is as follows:

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$30 - $25 (current share price minus purchase share price) = 5

plus $4.50 (the amount of dividends per share received) = 9.5

divided by $25 (per-share purchase price) = .38

multiplied by 100 = 38%

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This same method can be used to calculate the TSR of one company or a group of companies over multiple years.