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What
is the performance graph? |
In the Annual Report to Shareholders/Form 10-K Item 5 (Market Price
of and Dividends on the Registrant’s Common Equity and Related
Stockholder Matters), a company must include a Total Return Graph
showing the company's stock performance, assuming reinvestment of
dividends, for the past five fiscal years alongside a broad-based
market index (such as the Dow Jones Total Market, S&P 500 or DJ
Wilshire 5000) and either a Published Industry Index or Peer Group
of competitors selected in good faith, or of companies with similar
market capitalization.
This graph was required in the DEF 14A Proxy Statement from 1992
until 2006, but was moved to the annual report for all filers
whose fiscal year end falls on or after December 31, 2006. If
the registrant uses the form 10-K as it's annual report or does a
"10-K Wrap", then the graph must be included in that document, but
first and foremost, the graph must be included in the Annual Report
to Shareholders.
Dividend-reinvestment must also be incorporated for the Major Market
and Industry Index or Peer Group for the entirety of the measurement
period. This graph must be recalculated each year, which helps
investors in assessing the company's performance vis-à-vis overall
markets and the company's own industry in the given period.
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What
is Total Return Calculation for the Performance Graph? Is it the same as
Stock-Tracking? |
Total Return is not the same
as stock-tracking. It is much more involved, and much more difficult to
calculate than simple closing price return.
Total Return Calculation
includes the re-investment of dividends, historical split-adjustments,
special calculations for spin-offs and special dividends as well as
market-capitalization and shares out-standing information. Imagine
finding 5-years of historical, pricing, dividend and split data for 500
companies for the S&P 500 or 5000 for the Dow Jones Wilshire 5000 Index.
Not an easy task.
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What
about financial websites offering Total Return in Real-Time?
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Total Return can not be
calculated properly on “real-time” systems for the sake of a published
graph. “Real-time” systems are riddled with errors due to the massive
volume of trading that occurs and the vast number of companies reporting
earnings information each day. Virtually every online site makes
corrections for hours, sometimes days and weeks after trading is
finished on any given day.
All accurate, licensed Total
Return Data from S&P, Dow Jones, Dow Jones Wilshire, Russell, etc. is
accompanied by a trademark and considered proprietary. Mutual Fund
companies pay thousands of dollars a year to obtain this information for
their quarterly reporting requirements. If you are not paying a
licensing royalty, you should double-check your source of Total Return
Data.
Virtually all Total Return Calculations are trademarked and take quite a
bit of time to calculate for Published Indexes.
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Does
RDG Guarantee SEC Compliant Calculations? |
Yes.
RDG guarantees that all of its calculations are done in accordance with
SEC methodology.
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What
if a company has not been trading for five years? Must they still file a
Performance Graph? |
Yes. If
a company has been trading less than five years, they must plot a chart
beginning with their first day of trading.
Companies that have a short
fiscal year (for example, following an initial public offering, as the
result of a spin-off, or after emerging from bankruptcy) must do a stock
performance graph for the short year unless the short year is 30 days or
less.
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What
constitutes a “Published Index”? |
The Index must be maintained
for Total Return with reinvested dividends on a regular basis, and the
current components must be easily available to shareholders without
subscription to a service.
A "published industry or
line-of-business index" is one that is "accessible to the registrant's
security holders" and, if prepared by the registrant or an affiliate, is
also "widely recognized and used."
Self-constructed indices
(which term includes those prepared by a third party for the registrant
and which are not "published") are not prohibited or discouraged, but
they must be weighted by market capitalization (as are most published
indices) and include identification of the component issuers.
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Can we change our Major
Market, Industry Index or Peer Group? Is it difficult?
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Not to worry, it’s not
difficult at all. Companies do it all the time.
The SEC requires that both
old and new Indexes/Peer Groups be shown for one “transition” year,
after which the old Indexes/Peer Groups will be removed from the graph.
The company must explain the
reason(s) for this change in the text accompanying the graph. This
requires only a couple of sentences.*
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Can we show different time
periods than a five-year chart?
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Yes, in addition. The
five-year performance graph must be included.
A registrant may show both a
three-year graph and a five-year graph. Many companies include one-year
or ten-year charts in addition to the five year to give their
shareholders a picture of long and short-term performance.*
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