Wednesday, November 11, 2009

Adjusted Stock Prices vs. Unadjusted Prices

Determining if a stock is at an all-time high price is a simple exercise for companies that don't split their stocks or pay dividends. Google (GOOG) is an example: its pays no dividends and its stock has never split -- it currently trades near $567, up from its IPO around $100. Things get a bit tricky when a stock splits and, even more complex when dividends are paid. These events need to be accounted for, which leads to the use of adjusted historical stock prices. You can read more about how this is calculated here at Investopedia. The bottom line, however, is that stock price adjustments affect whether or not a stock is at an all-time high. In this post I'll show an example of NUS, a stock that was highlighted on the blog earlier this week. Hopefully this will provide some food for thought.

What you would have seen on the blog are the charts below from Finviz and BigCharts. Notice in the chart on the right that NUS does not appear to be at an all-time high. I think this is because BigCharts adjusts for splits, but not dividends.

The next charts show my own charts for NUS, based on unadjusted closing price data from Yahoo Finance. First, here is the unadjusted data (daily candlesticks on the left, monthly OHLC on the right). Notice that like BigCharts, these data indicate that NUS is not currently at a record high price.

Next take a look at my charts based on Yahoo Finance adjusted closing price data. The difference may not be obvious at first, but if you carefully compare the right chart below to the right chart above you can see that NUS is at an all-time high using the adjusted data.

Here is another comparison chart showing daily closing prices. The difference between adjusted and unadjusted prices is clear and it is evident that NUS is currently at an all-time high based on adjusted prices, but it is not at an all-time high price if we use unadjusted prices.

I wanted to know what adjustments would have been made so I visited the company's website. You can see from the screenshot below that there have been regular dividends but no splits. These dividends are the reason why the adjusted historical prices are lower than the unadjusted prices.

At the end of the day I is it better to use prices adjusted for dividends or not? I can see an argument for both sides. On one hand, it makes sense to take dividends into account because they return value to the shareholders, and the shareholders are more likely to be showing a profit if they have been paid dividends. On the other hand, however, many charting programs do not show adjusted data (adjusted for splits, yes, but not for dividends) and therefore many traders are not looking at adjusted prices. If a stock is "breaking out" using adjusted data, but at a double-top using unadjusted data, then which signal is more meaningful?

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SumFlow said...

You left out what you are adjusting for. If you go back to Bigcharts and add the upper indicator Total Return. You will see the price adjusted for dividends reinvested.

This is the most accurate way to compare two securities because in the end it is total return that matters when Investors liquidate.

One reason charts are usually not shown this way, is because it would be difficult for anyone to actually have this price for real, because of taxes, commissions, costs and the slippage associated with reinvestment, let alone the effect on the market price if these distributions had bought shares from departing shareholders.

From a cash flow point of view, the funds have left the company. The companies liability to provide income to that cash is finished. A shareholder is not entitled to any more cash flow from the company on the cash that was paid out.

In general charts show total return as a novelty. You cannot expect other traders to use a factious price for support and resistance.

Stock Splits on the other hand have none of these effects on the company or price. A 2:1 Split is like changing a hundred dollar bill for two fifties. Shareholders have the same claim on assets after a split as before. They just have a different number of shares.

Hybrids do exist however. If you take a holding company like Kinder Morgan Management (KMR). Kinder Morgan shareholders receive stock in lieu of cash. If it came from KMR it would be a Split of KMR’s assets, but it is an external dividend paid by another company which increases the shareholders claim on future cash flow.

The price must be adjusted downward (Bigcharts does automatically) to reflect the cost of the claim on cash flow of the original share.

A cash dividend is assets leaving the company.

A Stock Split is like cutting a Pizza Pie (and the associated cash flow) into different size slices. Overall the cash flow to each share stays the same.

Receiving an external dividend is like getting an additional slice of pizza, and the proportional increase in cash flow that comes with it.

Andy said...

Hi SumFlow,
Thanks for your thoughts on this. I I agree that unadjusted prices are more appropriate for technical signals.

Sumflow said...

Prices should be adjusted for stock splits, and new capital shares, for accurate technical signals.

Andy said...

Yes, I should have said unadjusted *for dividends*.

Having said that, using Yahoo Finance as a data source, the options are 1) unadjusted prices (for divs, splits, new shares), 2) adjusted prices (for all corporate actions). I choose to use the latter.