Citigroup Begins Trading Post 1-for-10 Reverse Stock Split Monday May 9, 2011

The big day is just about here: Citigroup begins trading post 1-for-10 reverse stock split Monday May 9, 2011 after being previously announced on March 21, 2011.

Among the things pointed out below are some views on the recent chart patterns that have developed in Citigroup including a recent triangle formation and potential ongoing Elliott Wave pattern. You'll find the chart below.

I previously added a page with some analysis/opinons/thoughts shortly after the announcement here: Citigroup Announces 1 for 10 Reverse Stock Split and today's article will point out some comments and idea's circulating in the media.

  • As mentioned in my previous article, the majority of companies take this kind of action are doing so for some sort of short term temporary "fix", or "boost". This time appears to be the same in many people's view.
  • Large institutional investers/traders and mutual funds are sometimes restricted from purchasing shares of stocks priced below certain price levels, such as $5.00 or $10.00 per share in some cases. This 1-for-10 reverse stock split will boost the per share price up to around $45.00 from the current $4.52, thus getting around this restriction. This could be a positive allowing for more money to flow into the company via stock purchases.
  • The move to reduce the number of outstanding shares resulting from the split will allow Citigroup to start paying a dividend.... $0.01 per share (the minimum payout), quarterly. They will have around 2.9 billion shares outstanding after the reverse-stock-split. $0.01 x 2.9 billion shares equals $29 million dollars payed out in dividends per quarter. If they didn't do the split, they would have approx. 29 billion shares, x $0.01 per share per quater if they wanted to pay a dividend. This would equal $0.01 x 29 billion = $290 million dollars payed out in dividends per quarter. So the reverse-stock-split makes sense to the company here if paying a dividend is important, even if it is at only $0.01 per quarter.
  • A reverse stock split could be considered a sign that the company is not confident that they'll be able to increase the per share price/value of their stock on their own, attracting larger investors down the road.
  • As mentioned in my previous article, the types of traders/investors in Citigroup will likely change come Monday. Since Citigroup (C) has been a low priced stock for quite some time now, many traders move in and out of the stock daily, making it the most actively traded U.S. stock. Once the split takes effect, the traders who move in and out on a daily basis will most likely move on to another low priced stock and Citigroup would hope to replace those with long term investor money instead.
  • Since the reverse stock split for Citigroup was announced on March 21, 2011 when shares were trading at $4.43, prices have moved in a sideways channel staying between $4.40 and $4.60 per share. This to me, hasn't shown much confidence from long term investors who think this may be a good idea and would likely try to get in early, because they haven't yet.
  • Looking at the chart below, you'll also notice that prices have also formed a symmetrical triangle and have come to an end of the pattern. A move higher or lower from here would fit the pattern perfectly, with most moves typically continuing in the direction prior to entering the pattern itself, which is down!
  • Looking back a bit further and applying Elliott Wave patterns to the chart, there appears to be an almost perfect 1-2-3-4 formation so far, with only 5 to come, which would be down as well. Wave 4 is typically a sideways/triangle type of movement where prices consolidate before resuming the prior trend to finish the next degree overall wave.
Citigroup 1-for-10 Reverse Stock Split

We'll have to see how everything play's out in a year or two from now. History after a 1-for-10 reverse stock split doesn't usually have a good outcome, but only time will tell.

Update: I've posted the first update article after Citigroup began trading post reverse stock split here: Citigroup Update 2 Weeks After Reverse Stock Split

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