Friday, April 27, 2018

Understanding the Adjusted Close Stock Price

Understanding the Adjusted Close Stock Price

Question:  The table below contains stock dividend payment information and stock closing price information for IBM.   Use this information to calculate the adjusted closing price for IBM on March 15, 2017.

Explain why the adjusted closing price concept is useful?  What does the difference between closing price and adjusted closing price measure?

When should analysts use the closing price concept and when should they use the adjusted closing price concept?

Dividend and Stock Close Price for IBM
1.5 Dividend
1.5 Dividend
1.5 Dividend
1.5 Dividend

Discussion:   The adjusted closing price accounts for payments of dividends and stock splits.   A comparison of price today to adjusted closing price in the past will accurately measure returns after stock splits and accounting for the reinvestment of all dividends. 

The adjustment of closing prices for dividend payments requires the analyst to multiply the actual close price by (1-D/SP).   Here D is Dividend and SP is stock price on dividend payment date.

The adjustment is made to all stock prices prior to the payment of the dividend.

The Calculation of Adjusted Stock Price on March 15, 2017:

March 15, 2017 is prior to all four dividend payment dates listed in the table.   We must adjust the actual closing price on March 15, 2017 by multiplying by the adjustment factor.

The adjustment factor is

ADJ = (1-1.5/153.85) x (1-1.5/151.57) x (1-1.5/143.47) x (1-1.5/155.05)

Multiplying the adjustment factor by the actual closing stock price I get 168.92 for the adjusted closing price.   This is in fact the value of ADJ closing price on March 15, 2107 listed in YAHOO FINANCE.

More Discussion: 

A person spends $100,000 on IBM stock on March 15, 2018

Actual shares purchased is equal to 568.8 ($100,000/$175.81)

Shares purchased on purchase date plus shares purchased through dividend reinvestment is equal to 592.0 ($100,000/$169.92)

The difference 592-568.8  or 23.2 represents the shares obtained through dividend reinvestment.

Concluding Thought:  The adjusted share price is very convenient when analyzing returns from stock when dividends are reinvested in the original asset.  However, when dividends are spent or invested in a different asset class the analyst must follow the money.   The process of calculating returns when an asset is held for a long time and dividend are invested elsewhere can be a bit complex.

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