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What is 'Shareholder Rate Of Return'?

Friday 8th December 2000

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A single, composite measure is required to combine growth in share price with dividends and other returns. This is the purpose of the Shareholder Rate Of Return (SROR). It is defined as the annualised total return to shareholders from maintaining their investment in a stock over a period. Maintaining the investment means neither taking any net cash out nor putting any net cash in to the stock during the period. This involves immediately re-investing all cash receipts, eg, from dividends, and participating in all capital transactions, eg, rights issues. Stock is sold as required in a rights issue so as not to contribute any net new capital.

Below is a simple example of how the SROR would be calculated for a $1000 investment over a one-year period:

Original investment$1000
+ Dividends received$40
+ Imputation credits$10
+ Price appreciation$50
= End value of investment$1100
= change in value ÷ original value
= (1,100 - 1,000) ÷ 1,00010%

In general terms, higher rates of return indicate better performance. But, consideration must also be given to the risk profile of companies when comparing their relative performance. Naturally, investors expect a higher rate of return from companies with higher levels of risk. For example, they will have different expectations for returns from a start-up software company compared to a long-standing producer of staple food products.

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