Total shareholder return is the profit generated by a combination of the change in the share price over the measurement period, plus any dividends paid by the company in the interim. This measure is used by investors to determine the gains generated by their share holdings. The formula for this total shareholder return (on an annual basis) is:
(Ending stock price - Beginning stock price) + Sum of all dividends received during the measurement period
= Total shareholder return
The total return can then be divided by the initial purchase price to arrive at a total shareholder return percentage.
This measurement can be skewed to a considerable extent if a shareholder has control over a business. If this is the case and the company is sold, then the shareholder will likely be paid a control premium in exchange for giving up control over the entity.
Example of Total Shareholder Return
An investor purchases shares of Albatross Flight Systems for $15.00 per share. One year later, the market value of the shares is $17.00, and the investor has received several dividends totaling $1.50. Based on this information, the total shareholder return is:
($17.00 Ending stock price - $15.00 Beginning stock price) + $1.50 Dividends received
= $3.50 Total shareholder return
Based on the initial $15.00 purchase price, this represents a 23.3% total shareholder return.