Total Stock Return Formula

The total stock return formula calculates an internal rate of return of a stock to an investor during the holding period of this investment.

The total stock return for shareholders measures shareholder’s earnings, taking into account changes in stocks’ prices (capital gain) plus dividends paid over a given time period (usually one year).

It expresses the amount of profit received because of the change in stock prices of a given company and dividends paid during the investor’s holding period, in relation to the value of these shares at the beginning of a given period and is expressed as a percentage.

For example, a total stock return of 10% means, that over a given period the original value of the share increased by 10% due to price increase or a dividend payment.

Dividends may include not only cash payments returned to an investor, one-time or regular dividends, but also stock buybacks (programs when a company buys its own shares from the financial market).

Using total stock return as a measure of efficiency allows investors to compare companies in all sectors. TSR is effective when compared with other companies’ TSRs, so it should be compared with industry benchmarks or other companies in the same sector.

How to calculate total stock return?

The formula of total stock return is presented below:

Where P_E = stock price at the end of a given period, P_B = stock price at the beginning of a given period and D = dividends per share paid in a given period.

Examples of total stock return calculation

Example 1

• Let’s assume an investor buys 100 shares of Company ABC.
• The initial price of each stock is $10.
• Company ABC pays a dividend of 5% at the end of the year.
• By the end of the year an investor decides to sell the shares for $12 each.

Total stock return is then calculated as:

The investor’s total return is 25%.

Example 2

In example 1 TSR is expressed as a percentage. If you want to know the cash amount of the return, the following formula can be used:

Then the total stock return in cash amount for investment in the previous example is:

Example 3.

Another way of calculating total stock return is adding capital gains yield and dividend yield. Dividend yield is calculated by dividing the annual dividend by the share price.

In this case dividend is already expressed as a percentage and equals 5%.

Capital gains yield is calculated as:

Where PE = stock price at the end of a given period and PB = stock price at the beginning of a given period.

This formula is an alternative way of calculating TSR by separating the stock value change and dividends.

Advantages and disadvantages of total stock return

The most important advantages of TSR are:

• Simple formula and intuitive calculation,
• Publicly available data,
• External (appreciation of shares) and internal (dividend) prospects are used for the analysis of the company’s value,
• TSR can be used for both small and large companies,
• A possibility of using TSR to compare companies from all industries,
• Total stock return shows how the market evaluates the company.

The most important disadvantages of TSR are:

• TSR is applied only to companies that are on the stock market,
• TSR is calculated only at the overall level,
• Total stock return is only applied to investments with one or more cash inflows,
• The formula doesn’t include stock value appreciation. The rate of return calculation is based on profit that the investor achieves from both dividends and capital gain received as a result of an increase in the value of shares on the market. For the majority of stocks, TSR must include an element of stock appreciation.