This blog post was inspired by the way how Baltic companies exhibit stock performance in their corporate reports, which can be misleading and often not in the favour of the corporate image.
Looking through annual and quarterly reports, one often sees that company’s management compares its stock performance either with the country’s index (e.g. OMX Vilnius Index) or broader market index (like OMX Baltic Benchmark). This extra effort on behalf of management to provide comparison is greatly appreciated by the market participants. However, when comparing their stock performance with unsuitable/inadequate benchmark, companies often unwillingly show situation than it is inferior to reality.
There are two types of indices on NASDAQ Baltic market: Gross (also known as Total return) and Price. Price index is straightforward - it just shows stock price performance, while Gross index shows total return from investment and combines both stock price performance and dividends
As it can be seen from the chart above, the performance for the previous year is very different depending on the kind of index you refer to. Price index (PI) returned -2.6%, while Gross Index (GI) returned 3.8%. The results in an astonishing difference of 6.36%, which was mainly created by the generous dividends paid by the Baltic companies.
Now, let’s have a look at the situation, when the company’s price return is compared to the Gross index. If it is a good dividend payer, then the comparison obviously is not in the company’s favour and it returned less than the benchmark.
How would it look like if the company Y compared its price return to Price Index to demonstrate its relative performance?
Turns out that compared with the Price index, company appears to be a winner, returning 5.9% and outperforming the market by 1.77% as opposed to what is shown in the corporate reports!
In the end, however, investor cares about the total return, not about the price return, because s/he receives not only price return but also the dividend payments. See below how the performance of company Y looks like if paid dividends are reinvested back in the stock and the total return is calculated.
The total return for the company Y is 13.2%, while the Gross Index benchmark returned 10.8%, which is an outperformance of 2.35%.
To conclude - the choice of benchmark matters a lot and for the Baltic companies, which are good dividend payers, it is particularly important to pay special attention to it in order to show more accurate results.