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Total Shareholder Return: Planning a Future Perfect

Total shareholder return can not only be a measure of past performance, but it can be harnessed as the prime touchstone for planning future performance.

Fortnightly Magazine - January 2006

Total shareholder return (TSR) is a beguiling metric. Return on invested capital (ROIC), return on equity (ROE), growth rates, risk adjustments, and so forth rise and fall and interact in the various ways that make financial analysis intriguing, but at the end of the day, the number that tells how well a company has done for its shareholders is TSR. Because TSR represents the ultimate bottom line of financial performance, it can’t help but command the attention of board and senior management.

On the other hand, TSR frustrates management by seeming almost random in its operation. Management may believe it is doing everything right, setting ambitious plans, executing those plans and meeting its forecasts, yet find that its TSR is no better than average. Meanwhile, the highest TSR in its peer group is likely to be posted by a company that was in trouble no more than a year ago. It all seems unfair.

Management can be forgiven for concluding that TSR is unpredictable, owing more to the latest investment fad than to any rational assessment of company performance.

TSR is a paradox among financial metrics—dominant in assessments of past performance yet peripheral in plans for future performance. This paradox can be resolved. Just as TSR serves as the ultimate arbiter of past performance, it can be harnessed as the prime touchstone of planning for future performance.

On the Plus Side

Let’s start with what is obviously good about TSR. First, as metrics go it’s admirably comprehensive. It tells the investor how much his or her investment value has grown. Value growth, of course, is not the only strategic aspiration utilities pursue. Reliability, reputation, strong customer service, community citizenship, and safety are the foundational elements of any utility’s mission. But to the extent that a utility also wishes to create shareholder value, TSR cuts to the chase.

Second, it’s simple. Find out how much the price of shares has risen during a given period, add the dividends received during that time, divide by the original investment, and you have the total return. If no dividends have been received, TSR reflects simply the change in share price. If no change in share price has occurred, TSR reflects simply the payout of dividends. Because of its simplicity, it can be researched and compared to any set of peers through a brief online visit to virtually any financial reporting service.

However, TSR also has its limits, which are sometimes not fully appreciated. It tells us how well an investment has performed over a given period— not necessarily the same thing as telling us how well management has performed. TSR is the metric that never stops asking, “What have you done for me lately?”

Posting a high TSR is like getting the academic award

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