Saturday, 24 April 2010

Shareholder value and Total Shareholder Return (TSR)

While profits are owned by the shareholders, they are not necessarily paid out as dividends, and may be retained  in the business to fund its growth.  For instance, biotech companies often do not pay a dividend to their shareholders.

In reality the return a shareholder sees is the increase in the share price over time, and the cash dividends received from the company.  Typically this TSR is normally calculated over the past 3 to 5 years.

This can be further complicated by using discounted cash flow to reflect the fact that money earned in the future is worth less than its worth today.  TSR calculated in this way is used by a number of companies, but there is little evidence that the stock markets have adopted this as a measure of shareholder value over more conventional measures such as the share price and profit performance.

A drawback of looking at TSR is that we are either

  • looking at historic performance over the last 3 to 5 years (which is not necessarily an indication of future trends) or 
  • we are estimating future values (say, for the share price) which are not always borne out in practice.

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