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i am a newbie...woul like to ask seniors about this issue:
Company X, share denomination price is 10$ per share. Today's closing price is 238$, today's volume 619,900. The company announces a stock dividend payment of 20%, so each shareholder receives 1 more share for every 5 shares he/she currently holds (a 5:1 ratio). The company also issues more shares as the following scheme:
- Current shareholders are entitled to a 5:1 ratio purchase of new shares (they have the rights to buy a number of new shares corresponding to 20% of the current number of shares he/she holds). Issue price to current shareholders is 50$.
- Management boards, Internal controls, employees etc. have the rights to buy the new shares also at 50$ per shares (allocated according to managment levels/ seniority).
- Offer to other big institutional investors at the price not lower than 150$.
Now tomorrow is the day the traded share price is reduced to reflect all those changes. History data up to today should be adjusted for smooth technical analysis. How should I do the adjustment? Do I miss any information such as total outstanding shares, number of new shares issued to internal employees and to outside institutional investors?
What if the dividend payment is made in cash, or both in cash and in stocks?
Many thanks so far... but if you could enlighten me a little more about the next problem:
...everyday the stock market opens with a "reference price" which is the previous day's closing price. On the above case, what should tomorow's reference price for company X' shares be to reflect the dividend payment and new stock issue?
thanks again...
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Rank: Advanced Member
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Hi Mastermedea - I write this from a data vendor's perspective.
Firstly stock dividend of 20% means, a 1 for 5 bonus issue, which means a dilution factor of 0.833333
Secondly, offer of 1 for 5 @ $50 where the last traded on the day before the ex-date is $238, means a dilution of 0.868347 - note that this assumes that all shareholders take up the offer (something not known until after the rights issue is completed)
No adjustment is performed for placements of shares not applicable to all holders (i.e. institutional or internal placements)
Therefore the adjustment that is made is 0.833333 * 0.868347 = 0.7236225
I would expect this stock to open at $172.22 but exactly where it opens is entirely up to the market to decide.
Hope that helps.
Cheers,
Richard.
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Rank: Member
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Thanks Richard, now that the adjusted price is around 172$, for smooth technical analysis what adjustment should be made to traded volume data up to the day before the ex-date? Is the principle to (1) maintain the money flow, or (2) to maintain the ratio between the traded volume and the total outstanding shares?
Let me clarify myself:
Total outstanding shares is 3 million, today's traded volume is 500,000. Now that today's closing price should be adjusted from 238 to 172 to reflect the above changes. Assume that the stock dividend payment and new issues brings total number of outstanding shares to 4 million. Should the traded volume for today be adjusted as follows:
(1) adjusted today's traded volume = 500,000 * 238 / 172
or
(2) adjusted today's traded volume = 500,000 * 4 mil / 3 mil
?
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Rank: Advanced Member
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Your volume needs to be divided by the dilution factor.
So all volumes up to the day before the ex date need to be divided by 0.7236225
All that the adjustments are trying to normalise your chart to show an accurate capital return assuming you had participated in all capital-related events.
PS - It's often better just to be sure your data vendor does this all for you. There's over 1000 of them every year on the US markets.
Cheers,
Richard.
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Rank: Member
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Many thanks Richard, and nice to meet you at Stock Meeting Place forum. Actually, in our country the stock market is very young and there is no official data supplier that does all the adjustments for TA investors.
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Rank: Advanced Member
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Joined: 11/25/2006(UTC)
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Hi Richard,
I also have some questions on data adjustment.
1. Assume that a company pay a net dividend of $0.10 per share and a 1 for 5 right issue at $0.50 a share.
On last cum date: closing price $1.00 and vol. 10,000.
What is the adjustment factor for the price and vol.?
In my opinion it is equivalent to a 1 for 5 bonus issue. Am I right?
2. In adjustment for dividend, should I deduct the gross or net (of tax) amount from prices?
Thanks.
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Rank: Advanced Member
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Dividends aren't subject to adjustments for normal charts.
So, a 1 for 5 rights issues @ $0.50, last price before exdate is $1, yields a dilution factor (DF) of 0.916666667. Multiple all prices by the DF before the exdate, divide all prices by the DF before the exdate.
It's not the same as a bonus issue because there is a cost associated with participating in the rights issue. A 1 for 5 bonus issue gives a DF of 0.833333333.
Adjusting for dividends provides you with a total return chart. Total return charts do not take into account any taxation implications (as they vary from individual to individual, individual to corporate entity, local entity to overseas entity etc.)
Cheers,
Richard.
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Rank: Advanced Member
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Joined: 11/25/2006(UTC)
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Hi Richard,
Thank you for the reply.
There are some stocks its market price only, for example, $0.80 but pay a dividend of $0.10. If no adjustment make it will be a big gap after the ex. date. It gives the impression that the stock is something wrong now. It also cause many indicator values turn bearlish.
Therefore I think dividend shold be adjusted at least for dividend relatively large compare to the stock price.
Like the example given in my last post. Many companies in Singapore design such that the dividend is exactly just enoungh for the price of right issue.
In my example, I pay $5 to buy 5 shares cum div and right. I will recive $0.50 dividend and use it to buy 1 right share. The net effect is I pay $5 and get 6 shares in total. It is same as I buy 5 shares and the company give me 1 bounus share.
By the way, it is the first time I come across the terms normal charts and total return charts. Could you kindly give some explanation of the differences between the two.
Thank you every much.
Wan Bow.
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Rank: Advanced Member
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Joined: 4/5/2006(UTC)
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Location: Norgate Data
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Typically charts used by investor, traders and instituions-alike are capital return charts. i.e. after all adjustments they show the price appreciation of a security excluding any dividends. Which chart would you like to perform your analysis on - your own specialised chart or that used by institutional traders?
A total return chart shows both your capital return AND cash dividends.
Most index charts are a capital return - e.g. S&P 500, Straits Times Index, Dow Jones Industrial Average etc.
Only specialised data vendors provide total return chart data (e.g. S&P 500 Total Return etc.). Some markets traditionally produce very little dividend return (eg. US markets) so many investors/traders bank on capital return.
Another way of looking at it is that the dividends are simply paying you the "cost of money" that you have invested in that security.
Normal technical analysis is typically performed on capital return charts, not total return charts (e.g. people don't take into account dividends when deciding support/resistance levels).
Companies that need to do rights issues are undercapitalised, which is why you don't see it happening on big companies. Unfortunately more and more complex corporate actions to raise capital are confusing traders and investors. We've seen a increasing trend of this happening in speculative securities.
Cheers,
Richard.
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Rank: Advanced Member
Groups: Registered, Registered Users
Joined: 11/25/2006(UTC)
Posts: 79
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Hi Richard,
Thank you again for your detail reply.
Learn some new thing today.
[:)]
Wan Bow
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