shareholder return This is a topic that many people are looking for. thetruthaboutdow.org is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, thetruthaboutdow.org would like to introduce to you A Guide to Calculating Total Shareholder Return. Following along are instructions in the video below:
“To a how to guide for calculating total shareholder. Return or tsr my name is is terry adamson and i m here with harrison saloon. We represent aon hewitt newbridge magloire and radford the global leader and tsr evaluation and tracking with pure tracker harrison. Why don t you bat leadoff and providing an overview of total shareholder return thanks terry to paraphrase wikipedia.
Tsr is a measure of the performance of a company s shares over time. It combines price appreciation and dividends paid to show the total return to a shareholder expressed as a percentage tsr is calculated by taking the price at the end subtracting the price at the beginning. Adding any dividends paid over the period and dividing the entire term by the price at the beginning this formula represents an accumulated dividend methodology where the dividends paid over the period are simply added into the final calculation of tsr. We believe the dividend reinvestment approach.
Which we ll show you in a few moments is a more theoretically robust alternative as a better captures the actual return to a shareholder. There are a handful of other terms. You should be aware of when thinking about tsr total return to shareholders compound annual growth rate or kegger internal rate of return or irr or simply total return are all synonymous with total shareholder. Return well this may seem straightforward.
There are some complexities that can arise in the calculation of tsr. Some topics will be taking you through today include averaging periods regular dividends and timing. Stock splits restructurings and spin offs and currency conversions to get us started. I ll take us through the concept of averaging periods.
Companies use averaging periods in order to smooth out stock price fluctuations for their calculation of tsr. A 20 or 30 day averaging period is typical. But in this example. I ll take us through a simple five trading day average.
The schedule of stock prices on the screen in front of you represents five trading days to get the average price over the five trading days. We simply add up all the prices and divide by five this equals one hundred and three. We would then use this hundred and three dollars as either the beginning price or the ending price in our calculation of tsr you can see that even though. The stock price went as high as a hundred and five dollars and as low as 100 over the averaging period.
The average price came out somewhere in between the more days you add to an averaging period. The less impact that any single day s stock price will have on the average price. Terri s gonna take us through our next topic dividends with respect to dividends. There are several dates to be aware of first is the declaration date.
Second is the ex dividend date. Third is the record date..
And last comes. The payable date. Without going into the nuances of each of these dates. The important thing to be aware of is that the ex dividend.
Date. Is the theoretically correct day for reinvesting. It represents. The date that an investor is guaranteed to receive the dividend payment.
Let s do an example in this example. We re going to introduce the concept of asset value. Now let s also recall example one where we averaged five days to come up with an average of a hundred and three dollars per share now in this example. We re gonna keep things everything the same but on start date minus three we are gonna assume the company pays out a dividend of two dollars and fifty cents scrolling through this example.
We will see the start date. Minus five is still a hundred dollars per share. Start date. Minus.
Four is also still a hundred and five dollars per share. Now on start date minus three when in example number one it was a hundred and two dollars and fifty cents per share. It is now a hundred dollars because this company paid out two dollars and fifty cents. So the price of the underlying shares now a hundred dollars.
But with that two dollar and fifty cent dividend. The individual can buy an additional point zero to five shares because the stock price is a hundred so now the individual owns 10. To five shares start date minus two is unchanged at a hundred dollars per share with one point zero to 5 under line shares start. Date.
Minus one also unchanged at 102 and 50. Cents also with 10. To 500 shares. The asset value is simply the stock price multiplied times the number of shares.
We now will average the asset value to come up with a five day average of a hundred and three dollars and one cent note that one hundred and three dollars in one sense is different than the original from example one of a hundred and three dollars and that is because after the day that they bought additional shares point o. To five shares..
The stock price increased. And so it s representative of the appreciation from start date. Minus. Three hey.
Let s add another dimension of complexity now let s bring in splits harrison. Do you mind walking through an example with a stock split sure terry a stock split occurs when a company divides is its existing shares into multiple shares the number of shares outstanding increases. But the total dollar value of the shares remains the same this has no effect on the underlying value of the company. But it adds a layer of complexity to the calculation of tsr.
I m going to take you through a simple example involving a two for one stock split in this example. The company issues one additional share for every one share outstanding. But the dollar value of each share is cut in half on start date minus for the company undergoes a two for one stock split. If you recall from our earlier example.
The price on start date. Minus four was one hundred and five dollars after the stock split the prices dropped to fifty to fifty. But you can see in our shares column that the number of shares is doubled from one to two the total asset value is one hundred and five dollars. The same as before the split occurred.
You can see how this is similar to the methodology that we ve applied to dividend treatment. The alternative to this type of method would be to apply a split adjustment factor. Where all the prices would need to be split adjusted on either a golf go forward or backward looking basis. We do not consider the adjustment method to be best practice as it adds yet another layer of complexity to the tsr calculation building on what we ve learned about stock splits will apply the same logic to spin offs.
Spin offs are actually very similar to stock splits and that the price of the stock will drop by a certain ratio. But instead of receiving the equivalent amount of shares in the original company you receive shares in a brand new company. Let s consider an example where a company called old co spins off into two new entities. One called new co and the other called spin co for every one share of old co.
You will receive one share of new co worth. 30. And one share of spin co worth. 20.
After the stock split and the dividend that we ve already discussed we re holding. 205 shares of old..
Co that means will receive 205. Shares of spin co worth. 20. Apiece in order to track.
Tsr we will assume that these 205. Shares of spin. Co are immediately liquidated for 20 apiece. We ll then use those proceeds to buy more shares in new co at 30 apiece.
The total proceeds from our liquidation of spin. Co chairs is 41. If we use these proceeds to buy 30 shares in new co. It allows us to buy an additional one point three six seven.
Shares if we. Add these one. Point three six seven shares to the 205. Shares that we already own.
We re left with a total of three point four one seven shares finally by multiplying the three point four one seven shares times the 30 price per share of new co. We end up with an asset value of 102 dollars and 50 cents. You can see that this is unchanged from the previous asset value. Even though.
A large corporate transaction has occurred next terri s can introduce another example currency conversions. More and more global organizations are selecting international peers. Which brings the question do we measure tsr and local currency or a common currency. One large governance organization.
The abi specific specifically states in its charter to use a common currency. Which means that all stock prices should be converted on a daily basis and requires a source for international exchange rates. This is a significant challenge and is worthy of its own video. Which can be found at our portal next.
We re gonna give an example of some other methodologies for calculating tsr which we see in the marketplace. Other than our theoretical best practice..
The first is through the use of volume weighted average prices or view opps. Generally. We don t believe these are necessary especially. Since these plans generally have an averaging period to smooth out the calculation.
Further. It brings up the question is the v. Wap. An intraday v.
Wap. Or a closing stock price view up the second and third. I m going to categorize into the same sort of simplifying assumptions. That s to not have any dividend reinvestment or instead to use dividend reinvestment at the end of the month or end of the quarter.
Both of these are approaches to simplify the calculation. But realistically in this era of high technology. We see no need on using any simplifying assumptions away from the theoretical best practice of the ex dividend date. The fourth approach.
We ve seen is something i fundamentally disagree with and that s using the geometric average of t srs. During interim periods throughout the performance period. For example calculating a ts are for year 1. Also calculating a ts are for year 2.
And also calculating a ts are for year 3 and taking a simple geometric average of those 3 years by doing that you re actually rewarding volatility and stock price. And it s an approach that i fundamentally disagree with this concludes. Our instructional video on how to calculate t sr. If you d like some more information.
You can visit our web portal at relative tsr comm. There you can find some of our white papers. Including a how to guide for calculating total shareholder return and managing relative tsr with global peers for terry adamson. I m harrison salone.
We hope to ” ..
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