Total Shareholder Returns - How to Calculate it? - YouTube

Hi, in this video we will discuss what is total shareholder return,

how is it calculated and what are the drivers of total shareholder return.

TSR or total shareholder return is the rate of return earned by an Investor

by investing in stock of companies during the investment period.

An investor investing in stock of companies makes money in two ways.

First is the capital appreciation or loss from rise and fall

in share price of the company and second is the dividend yield earned on the stock.

TSR is an effective matrix from investors perspective

to compare the performance of stock returns of different companies.

Share performance comparison in itself may not give the correct picture

as the performance of companies might differ in share price appreciation or dividend yield.

Few companies may have High share appreciation and low dividend yield,

while others may have low share price percentage change and high dividend yield

and that is the reason why total shareholder return is important in an investor perspective.

Now let us discuss how to calculate total shareholder return for one year.

TSR for one year is calculated as changing share price of a company during the year

+ the dividend received during the year

divided by the share price at the beginning of the year.

Let’s understand this with the help of simple example.

Suppose you have purchased share of ABC Limited for $100 on 1st January 2019,

on 31st December the share price is $112

during the year you also earn $5 as dividend.

In this case the share price appreciation is $12 that is 12%

the dividend yields $5 which is 5%. Therefore, the total shareholder return 17%.

Let us discuss the drivers of total return to shareholders

so, as discussed total shareholder returns are driven by change in share price

+ the dividend yield earned during the holding period.

We can break change in share price in to change in earning per share and change in P/E multiple.

So, share price change is driven by EPS, which is earnings per share

and price to earnings multiple which is investors expectation.

If we multiply the change in share by the number of shares, we get change in market capitalisation.

Similarly, if we multiply change in EPS with the number of shares,

we get the change in net income growth for the overall company.

And price to earnings multiple becomes market cap to net income multiple

which is similar to P/E multiple at company level.

So, the drivers of TSR are net income growth

change in investor expectation, which is the P/E multiple + the dividend yield.

Let us discuss each of them one by one.

Let us discuss the factors which put impact in the net income growth

of sub company and thus drive the TSR performance.

Net income growth can be impacted by multiple factors

like Revenue growth, cost deduction, or margin improvement, leverage or capital efficiency.

Revenue growth is driven by an increase in prices or volume growth.

A company strategy depending on the Industry it caters to.

For example, an Indian telecom player first reduced the price is drastically to acquire customers.

However, once the industry got consolidated to two or three players

gradually increased the prices for their growth.

Thus, the strategy changed completely within a few years.

First, they reduced the prices to acquire the customers and improve their customer base

and then increased the prices to increase their average revenue per user and enhance revenues.

A Pharma or a Hitech company may grow to a new product innovation like new medicines,

or technological breakthrough, a retail or cpg company may grow,

by expanding their products or expanding in other geography.

Therefore, growth in volume of revenue is important to increase the earnings

and enhance the cash flows of the companies.

However, all growth is not equally value creating.

Growth through acquisitions may not beneficiary for shareholders,

if the acquiring company is huge acquisition premium and does not realise full Synergy benefits.

Such growth may result in negative returns for shareholders.

Therefore it is important to understand, whether the growth is value creating for shareholders or not.

The second factor impacting the net income growth is cost reduction.

Return to shareholders are positive when return on invested capital is above cost of capital.

Returns are driven by margins and capital productivity.

Let us first discuss the margin improvement through cost reduction.

Cost reduction is important to maintain or grow margins.

Companies across most industries has started focusing on cost reduction to improve their margins.

Earlier the focus was just to reduce the general administrative costs

by outsourcing the share services to low cost locations like India and China.

However, with increasing competition many companies across the globe

have start focusing on cost reduction through use of Technology.

Spend management through efficient use of Technology Artificial Intelligence and machine learning.

Optimising their sales and marketing processes and automation.

Just like all growth is not value creating,

all types of cost reduction also not be good for corporate.

For example, if a CTG company reduces its advertisement and marketing costs,

it will reflect and increase in margins initially however the sales of the companies

would gradually being impacted because of low marketing spend

and thus impacting the growth of the company.

Similarly, a pharma company can’t reduce its R&D cost

as it would impact the new product innovation and hence the growth of the company.

Therefore, investor should judicially understand all the company has reduced its cost,

as all type of cost may not be equally beneficial for them.

Efficient use of capital is an important diver of cash flow and return on invested capital.

Working capital and capex management are important drivers to efficient use of capital.

Companies these days are focusing on improving their revenue cycle,

so as to reduce the day sales outstanding.

Companies are also using efficient supply chain across the value chain

to improve their inventory management.

A through analysis of investment in property plant and equipment

or investment on acquisition should be done to ensure,

that it is cash flow positive for the investors.

Leverage may also result in EPS growth and High shareholder returns

as cost of debt is low compared to cost of equity.

However, as the leverage increases the risk to the shareholders also increases.

An investor should understand the risk he wants to take by investing in a highly leverage company

as leverage has an amplifying impact on TSR.

Two companies having same operating profit may have different TSR because of leverage the one with leverage

will generate higher TSR, however in case of losses the company with low leverage will perform better.

Therefore, an investor should understand the risk and return

well before making investment in a leverage company.

P/E Multiple are driven by investor expectations.

Investor expectations on the future performance of the company is a critical driver of TSR.

A company which has delivered and high growth and high return on invested capital

in the past may not deliver high TSR

if investor expects declining operating performance of the company going forward.

This may be due to changing economic scenario or changing consumer preferences.

Decline an expectations on future performance would be reflected

in decline P/E Multiple of the company and hence on TSR.

A company with high investor expectation on performance will lead to high TSR.

Take an example of Netflix.

Netflix has delivered high growth but low or positive returns

or cash flows in the past. as it is investing heavily in online content for Future Growth.

With increasing preference for online video content,

it is expected to deliver an exponential growth in cash flows going forward.

So, this is reflected in high P/E Multiple of Netflix

resulting in high TSR in the last few years compared to S&P 500.

Look at the return of Netflix in the past five years.

Netflix has delivered around 380% TSR compared to 55% by S&P 500.

And this is primarily driven by high investor expectation

reflecting in high multiples of the company.

Similar is an example of an Indian Pharma Industry.

Before the pandemic that Indian Pharma Industry was facing

multiple headwinds in the form of pricing pressure regulatory issues,

quality issues etc.

Resulting in low performance of these companies on TSR but since the outbreak of covid-19,

investors expect pharma companies to perform better compared to the overall market

due to rising demand for medicines.

Here we have the year to debt TSR of the Nifty Pharma index and Nifty 50 index.

While Nifty Pharma index has delivered positive 24%

here to date returns where is Nifty 50 has delivered - 16% return during the year.

So high expectation on future performance of these Pharma Companies

have led to High TSR for the Pharma Industry.

Dividend yield is important to calculate the TSR however it is not a driver of TSR.

Dividend is paid by corporate out of the cash proceeds generated from business

after meeting the capex requirement and after paying of the liability.

A company making high investment in future growth may not have cash to pay dividends

and yet generate High TSR as growth investment made by them today

to result to higher cashflows in the future.

This is similar to the Netflix example which will looked at.

In a mature industry a company may have a high cash flow

for example a power generation company or a water utility company.

These companies may have low or no growth opportunity in future.

Such companies usually pay high dividends to shareholders as they do not want to retain cash

due to the limited growth opportunities.

TSR for such companies are relatively stable,

as investors do not expect much improvement in their earnings growth.

To summarise total shareholder returns is driven by profit improvement

which can be achieved through improvement in growth, cost reduction and capital efficiency,

Investor Expectations around future performance and dividend yield.

Which is a driver of TSR, but it is important to calculate TSR.

Hope you enjoyed this session, Thank you.