Citigroup 1 for 10 Reverse Stock Split

Citigroup recently announced a 1 for 10 reverse stock split (1-for-10) (announced on March 21, 2011 effective May 6, 2011). As an investor and/or trader, a reverse stock split is a pretty uncommon move for a company that is doing well.

A reverse stock split, in this case 1-for-10, means that if shares of a stock are currently trading at $4.50 prior to the split, then afterwards they will be trading at $45.00 a share.

In order to have 1 new share, it would take 10 old shares at the lower price. For example, if you had 1000 shares of Citigroup (C) prior to the effective date of the split, these shares would automatically be converted to 100 shares at the new price on the day of the split.

1000 shares at $4.50 each is worth $4,500 and 100 shares at $45.00 each is also worth $4,500. There is no increase or decrease in the converted value just because of the split itself.

Historically, there are many reasons why a company would do a reverse stock split and most of them are actually negative.

  • Many companies don't like their share price trading in the single digits and in some cases sub $1.00 levels. A low priced stock is can sometimes be considered a Penny Stock and along with that comes a bad reputation and warnings flags. A reverse stock split can raise the per share price out of the Penny Stock "psychological zone".
  • Some investors, mutual funds and hedge funds are restricted from trading low priced stocks. I have read in the past that the $5.00 price level is key to some of these restrictions as well as the $10.00 price level. An increase in per share price here would hopefully attract more larger institutional investors so the company can raise more capital if needed.
  • A company whose share price was significantly higher in the past, such as with Citigroup trading in the $50's as near as mid-2007, has a psychological downfall because many traders and investors remember those higher prices not long ago and compare them to the current low prices. Raising the price per share with a reverse stock split can help ease this psychological stress, at least to some.

Because Citigroup's stock (C) has been a low priced stock for some time now, it has become a favorite of certain types of traders who move in and out at a high rate each day. To see proof of this, take alook at the number of shares traded each day at Yahoo Finance, it's around a half a billion shares every day. By increasing the per share price thru a 1-for-10 reverse stock split, there may be a move of these traders to another low priced stock. This would be a negative for C in general because there is the potential for the share price to drift lower as investor and trader interest moves elsewhere.

I've written another article on reverse stock splits which also has an example of what typically happens afterwards to the share price. You'll want to see the example for yourself: Reverse Stock Split.

As far as Citigroup is concerned, this move brings back memories of other companies who have done this same thing in the past (such as in the example on my other article) and also of companies raising capital and increases in mergers and acquisitions occuring during market tops. We'll have to see where C is trading in a year from now to see how this scenario works out.

Oh yeah, I almost forgot, Citigroup also announced they'll be paying out a dividend again, $0.01 per share BASED ON THE SHARE PRICE AFTER THE 1 for 10 REVERSE STOCK SPLIT. In other words, they wouldn't have been able to pay out a dividend with the current low per share price ($0.001 per share?) and maybe now that they are paying a dividend, they'll attract additional investors who are restricted to only purchasing shares of dividend paying stocks.....

All in all, in most cases if not all, you could probably be safe to say that a reverse stock split is performed to improve investor perception of a company to attract additional investors.

Here's a chart from my example page on a reverse stock split so you can see what the potential outcome can be (next year I'll post a chart of how exactly Citigroup fared):

Reverse Stock Split

Return From "Citigroup 1 for 10 Reverse Stock Split" To "Stock Market Commentary"

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