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Total shareholder return has to do with the amount of profit received by investors as a result of their investment efforts. The process takes into consideration any depreciation or appreciation in the base value of the securities involved in the investment strategy, as well as any profits that generate from the reinvestment of dividends. Calculating the total shareholder return is often a good way to evaluate the current level of performance of the company issuing the securities.
Central to determining the current total rate of return is looking at any changes in the price per share of the security. Ideally, shares will appreciate in value rather than depreciate. This means that the price per share will increase. When this action takes place, the amount of total returns experienced by the shareholder will increase as well.
At the same time, calculating the total shareholder return also involves evaluating the impact of the change in price per share on dividends issued to investors. When the unit price increases, the chance for a positive impact on the amount of dividends paid is likely. However, a decrease in price per share usually has an adverse effect on dividends, although the degree of impact will vary depending on how the dividends are figured.
Generally, a period of at least six months is analyzed to identify the current total shareholder return. However, it is not unusual for up to one calendar year to serve as the time frame for the evaluation. One school of thought is that a full twelve-month period provides a more accurate snapshot of the performance of the stock. This is considered true as analyzing a full calendar year will allow for seasonal ups and downs, and also allow time for temporary factors that may have caused a short term rise or fall in the value of the shares to subside.
A total shareholder return that is positive is a strong indicator that the entity issuing the stock or security is stable and possible of future growth. When a negative total shareholder return is posted, investors should look very closely at relevant factors to determine if the securities should continue to be held, or sold before additional losses take place.
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