BT: TSR: The best measure of returns to shareholders (29 May 2007)

TSR: The best measure of returns to shareholders

SHARE price appreciation is often used as a proxy to measure the returns of a company to its shareholders. But it can be misleading, as investors receive returns in a number of other ways, including dividends, simple capital transactions such as rights issues, and complex capital changes such as share restructuring.

A single, composite measure is therefore required to assess these factors in combination, and this is the purpose of the Total Shareholder Return (TSR). In this Shareholder Scorecard, listed companies on the Singapore Exchange (SGX) are compared using this measure, based on basic financial data provided by Reuters and corroborated through Bloomberg.

The one-year, three-year, five-year and 10-year TSR calculations are from December 2005, December 2003, December 2001 and December 1996, through December 2006, respectively.

TSR is defined as the 'annualised total return to shareholders from maintaining their investment in a stock over a given period'. Maintaining the investment means not taking any net cash out during the period. This involves immediately reinvesting all cash receipts (such as dividends), participating in all capital transactions (such as rights issues) and selling stock as required, so as not to contribute any new capital.

Let's look at the TSR for DBS Group (DBS) for the last 10 years. As at Dec 31, 1996, the company had a share price of $7.49. After a number of rights and bonus issues, DBS's share price was $22.60 as at Dec 30, 2006. If we had invested $100 in DBS stock since December 1996 and reinvested all dividends received back into the stock, we would have an investment with a value of $392. This net value creation of $292 comes from both an appreciation in share price as well as dividend reinvestment.

Thus, the annualised total shareholder return of this investment is 14.6 per cent over the 10-year holding period.

However, consideration must also be given to the risk profile of companies when comparing their relative performance. Naturally, investors expect to be rewarded with a higher rate of return when investing in companies with higher levels of risk.

For example, investors will have different expectations for returns from a mobile phone company compared with an exporter of food products. To make some allowance for consideration of risk, the Scorecard groups companies by industry, using the sectors defined by the SGX.

TSR queries: score@lek.com or contact LEK's Singapore office at +65 6334 9021

Copyright © 2005 Singapore Press Holdings Ltd. All rights reserved.