Total Shareholder Return is a well-recognised tool for analysing the high-level performance of listed companies.
The TSR metric includes all factors that affect returns to shareholders.
The two major factors are typically movements in the share price and dividends paid.
TSR calculations also factor in the impact of franking credits, which add to the after-tax value of dividends, rights issues and any other corporate events that boost or dilute returns.
Greater focus on shareholder value has led to increased use of share buy-backs and other types of active capital management.
Most listed companies recognise there is little value sitting on large cash reserves where there is no immediate use for the funds.
Where returns on cash are lower than the company’s cost of capital, excess cash holdings are value diluting
They will often return the funds to shareholders and then raise fresh capital, through a placement or rights issue, if and when extra funds are needed.
The significance of this activity was illustrated by KPMG’s survey of the Australian capital markets 2003-04, which for the first time covered not only capital raised from investors but also capital that was paid back to investors.
In total, Australian companies raised $37.3 billion during 2003-04 but they returned an even larger amount ($38.7 billion) in the form of dividends, share buy-backs and the cash component of public takeovers.
Buy-backs, which amounted to $7.7 billion, normally boost a company’s share price through a reduction in the issued capital.
TSR analysis incorporates all of these factors to provide a single measure of a company’s performance.
An application of TSR analysis was provided last week when National Australia Bank disclosed that performance payments to its new Australian chief executive, Ahmed Fahour, would be tied to the bank’s relative TSR.
Specifically, the National’s TSR will be ranked against the TSR of Australia’s top 50 listed companies, and a basket of financial services companies in the S&P/ASX200 index.
