Total shareholder return, the share price gain plus dividends, is the ultimate scorecard of a public company and increasingly the basis of executive pay. But a single TSR number says nothing about where the return came from, and that matters enormously for whether it can be repeated.

Four sources of return

  • Revenue growth: a bigger business, at the same margin and multiple, is worth more.
  • Margin change: more profit from each unit of revenue.
  • Multiple change: investors paying more, or less, for each unit of profit.
  • Cash returned: dividends and share buybacks.
Annual total shareholder return of five companies over five years, split into its four sources. Companies A and B both return 12% a year, for very different reasons. Illustrative companies.

Company A earned its 12% a year mostly from growing revenue and improving margins, with a slightly lower multiple. Company B delivered the same 12%, but half of it came from investors paying a higher multiple, while the business itself grew slowly. Company A's return is built on performance that can continue. Company B's depends on sentiment that can reverse in a single quarter.

What boards should do with it

  1. Decompose TSR for your company and for your peers over three and five years, so the story behind the number is clear.
  2. Reward the operational drivers, growth, margins and returns on capital, rather than the share price alone, which includes the market's mood.
  3. Treat multiple expansion as a warning, not a success. It raises the bar for future performance, because the market now expects more.
BS

Bartor S.

Founder

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