How to Estimate the Total Shareholder Return?

And how it should impact investment decisions

To win in the stock market, you have several ways. Some investors will be focused on growth, others will be focused on dividends. In this article, I will present my method to calculate the TSR (Total Shareholder Return) and how it affects my investment strategy.

Over the long-term, growth is clearly the most important component to perform.

Source: BCG Analysis, Morgan Stanley Research

But it is not the only one and the investment horizon is crucial. To calculate my estimation of the TSR, I use 6 components and I calculate it on a 10 years horizon:

• Estimated organic revenue growth

• Estimated growth from acquisition

• Margin increase or decrease, annualized

• Valuation ratio increase or decrease, annualized

• Dividends

• Share buybacks

An example with Microsoft

Let’s take an example to understand the calculation of the TSR. Remember that the horizon is 10 years.

• Estimated organic revenue growth / 13.0%/year

• Estimated growth from acquisitions / 2.0%/year

• Margin increase or decrease / -0.5%/year - I expect a reduction of the margin which will reduce the performance by 0.5% a year

• Valuation ratio increase or decrease / -2.9%/year - my target PE is 26x, this represents 2.9% performance reduction a year from the current PE

• Dividends / 0.8%/year

• Share buybacks / 0.6%/year

• Total: 13%/year (13+2-0,5-2,9+0,8+0,6)

So at the current valuation, I expect Microsoft to have a 13% a year TSR. Of course, you can disagree with my hypotheses and it would be totally fine. The most important thing is to understand the logic behind the calculation.

The TSR impact to my strategy

To find a stock, I use the following steps:

• Screening / identification of a stock

• Using my scoring system to see if the stock is in my investable universe. Some examples for Europe and the US

• Analysis of the company, risks, opportunities, management, market, competitive advantage. This is why I present every week a deep dive on a company. Some examples for ASML, Zoetis, MSCI, Evolution, LVMH or Novo Nordisk

• Calculation of the TSR and estimation of the fair valuation

For me to buy a stock, the stock must pass all the tests. For valuation, I can buy above my fair price estimation if the TSR is high enough. If you want 12% return per year, you need to aim stock with at least 12% TSR.

If I already have a position and I see a low TSR, I look at what my gain on the stock is. If the stock gained +30% in a year, it is normal to see a smaller recalculated TSR, so I may keep the stock. But if the TSR is too low and fundamentals are degrading, I sell a company - however it is quite rare. I usually do it after a portfolio review.

Of course, not all my stocks have a +12% TSR. some, mostly staples and defensive companies, may have less but their goal is to protect the portfolio during cycle difficulties.

Also, I want a higher TSR for my small cap portfolio, so I aim for TSR above 15%.

5 examples of estimated TSR by stocks

Please note that these calculations are based on assumptions and are not financial advice.

• Microsoft 13% (13% growth + 2% acquisition - 0.5% margin - 2.9% PE + 0.6% buybacks + 0.8% dividend)

• Visa 11% (10% growth + 1% acquisition - 0.7% margin - 1.4% PE + 1.5% buybacks + 0.7% dividend)

• Evolution 16% (15% growth + 2% acquisition - 1.8% margin - 1.9% PE + 0.3% buybacks + 2.4% dividend)

• Merck&Co 11% (6% growth + 2.5% acquisition - 0.3% margin + 0.7% PE + 0.1% buybacks + 2.4% dividend)

• Adyen 14% (19% growth + 0% acquisition + 0.2% margin - 4.0% PE - 1.0% buybacks + 0% dividend)

Conclusion

This methodology helps me a lot to analyze potential long term returns and identify if a stock is a good investment for me. It also highlights the hypotheses done in the investment process. If growth, margin, acquisition policies change, it will impact the TSR and may change my investment thesis.