Is Citigroup’s Reverse Stock Split a Smart Move?

Posted by: Lauren Young on March 19, 2009

Last week I wrote a story about a pending boom of reverse stock splits. In that piece, Anton Schutz, manager of the Burnham Financial Services Fund (BURKX), predicted that Citigroup (C) would engineer a reverse stock split in the coming months.

It looks like Schutz’s prediction will come to fruition: In a filing with the SEC on Thursday, Citigroup says it is considering a reverse stock split as part of its effort to convert preferred shares to common shares.

Citigroup’s shares jumped more than 10% in early trading, but now the stock is down more than 6% to 2.89 in midday trading.

Why does a reverse stock split makes sense for Citi? “Whether the stock is $1 or $3, it’s still a low-priced stock,” Schutz says. “If you are the leading financial services company in the world, the psychology of a low-priced stock isn’t going to fly.”

Ideally, Citigroup will aim for a reverse stock split that gets the current price to the $30 range, Schutz says. (Based on today’s price, it would roughly mean a reverse split of 10 shares for one share.)

Yet research shows a reverse split is a signal to dump a stock. A 2008 study of 1,600 companies that did reverse splits found the typical stock underperformed the broad market by 50% on a risk-adjusted basis during the three-year period after the action. “Reverse stock splits are a strong indicator the company is going to be a significant underperformer during the near future,” says Jim Rosenfeld, co-author of the study and an associate professor of finance at Emory University’s Goizueta Business School in Atlanta.

What do you think? Would a $30 stock price make you feel better about Citi’s prospects?

Reader Comments

Rebecca Lacey

March 19, 2009 12:20 PM

I am single unemployed mother with cancer
I am hoping Citi does the right thing
for me. I have many shares and you are
killing me.

sath

March 19, 2009 4:58 PM

What Citi is doing is one of most dumo thing I can say, when the stock has recovered from $1 to $3.

Their moves to'day killed the rally from $3.69 to $2.65.

If they reverse split to $30, short seller will prowl on it and bring it to $3.

I have going to bail ASAP. this is not the good news.

Right now I see this as undervalued stock PPS $3 trading. and If I see this trading at $30 phycologically it will show overvalued and short target.

The Current CEO of Citi has no clue. I am sure if we replace him with rag-head will do a better job.

Niranjan Pathak

March 19, 2009 6:01 PM

The reserach might provide good indication for reverse splits in normal times. But these are tumultous times and we have to understand the backdrop in which it was done. After the announcement of the preferred conversion, this is the right thing to do. I am sure the companies researched did not have such a huge dilution because one single party (the Fed, in this case) had an option to convert into equity shares.

could be a good move

March 19, 2009 7:54 PM

Just an optimistic look on the situation.

For those large investment companies who are limited by firm policies that require fund managers to not invest in anything below $20 per share, it may be a good move, pending Citi is still seen as a good(although currently risky) value in the long-term, and moreover it may reduce the risk of Citi from being delisted from the exchange...an indicator that CITI is planning for the long term.

What may be an extremely benificial bonus of sticking through the reverse, is the chance of a greater reward if the stock splits in the future, although mere speculation at the current moment.

The strategy would work like this:

Say the reverse goes for 1-for-10 reverse split, and you have 100 shares at $3.67, you'll now have 10 shares at 36.70. Nothing has changed in the short term; $367 has been invested into C.

Now, into the optimistic speculation:

Say 5 years go by, and the stock is now trading at $100. You still maintain your 10 shares; $1,000.

However, now CITI decides to have a 20-for-1 stock split.

There shares may drop to $5.00, but you will now have 200 shares; still $1,000. Nothing has changed...but wait...you're investing and going long.

Now say 10 more years go by and there is no split, but the stock climbs back up to $100 from $5.00. Your 100 shares, which was reverse split into 10 shares, then split into 200 shares on the 20-for-1, is now valued at $20,000.

Had the splits not occurred (you still retained 100 shares), and the stock up to $100 in 5 years, or 10 years, your gain would only be $10,000.

The reverse split sucks when times are bad, but it may be necessary to keep from being delisted....some large investment firms may only be able to invest in companies that trade on the NYSE and other larger exchanges (as opposed to OTC).

The fact that Citi would reverse to keep from possibly being delisted indicates to me that CITI wants to be around for a while. That being said, a good business practice would be to reward those investors who were loyal to citi when times were tough, and stood by the company with a stock split that was inversly proportionally larger than the reverse split.

Jason

March 19, 2009 11:42 PM

This action might lead to mutual funds buying up Citi stock, since most mutual funds are restricted from buying shares under $5. If we see good earnings coming in, this might be a smart move for Citi.

AJ

March 20, 2009 12:57 AM

I don't think in the commonman's perspective this will sound good!!...I admit my knowledge is very limited in this area, but I have read many comments on internet soon after this news broke in the morning, the vibe was not good..and as expected the shares fell drastically..even the past shows that reverse split is always risky and did not fare well many times...but tomorrow(03/20) will be pretty decent for citi probably because of TALF funds and also amending law in Mexico to keep stakes in the profitable bank "Banamex"...I don't know what kind of investors will be interested in $30 share, but people will be with CITI in this historical economic fight back only if it makes them part of it...plz don't squeeze them further!! anyone listening???

ZW

March 20, 2009 2:42 AM

Higher stock price = prestige?? That's so stupid it isn't even funny. If it's a crap bank, it's a crap bank. Reverse split to $30 would only give short sellers the chance to push it back down to $1.

MandBinc

March 20, 2009 7:14 AM

I agree that a reverse stock split is the beginning of the end.

Too many companies have gone through the expence and found that the money would have been well spent elsewhere. Reverse splits are not an automatic as cash must be spent to generate the paperwork and solicit shareholder approval.

Those funds could be better used to either buy the stock back at $1, or less, then to parade the emperor around without any clothes on.

JIM

March 20, 2009 7:32 AM

I have to agree, Its always a signal to dump the stock.

Muralita

March 20, 2009 8:11 AM

I think the reverse split is a great idea. Why? At $1, Citi stock has not much room to fall. At $30, it can go a longer way before it is toilet paper.
This is this kind of perverse financial engineering that killed Wall St and is taking the world down with it. When will these guys ever learn to do a day's HONEST work and get their firms to trade at their REAL value?

Hugo van Randwyck

March 20, 2009 9:10 AM

Another option for shareholders, is for the business to be 'demerged' into 100 separate companies, fairly easy, starting with 50 states, maybe some states have 2 or more companies, also overseas branches becoming separate, also different business units, retail, M&A etc. So each share is around $0.03 each. Then let them sink or swim or be bought out. It's likely there are highly profitable parts of Citi, that could be worth more than $3 a share right now, standing on their own. Is the current size of Citi, more to do with bankers delusion or improving the running of the business units and shareholders value.

angryman

March 20, 2009 11:11 AM

Hey redneck 'Sath' it was your fellow redneck thieving white scum who engineered this financial crisis, don't blame any other enthnicity.

nadine brown

March 20, 2009 12:23 PM

These companies are very bad news they are linked to a media group.
they are abusive, scum of the earth.
earth will be a better place when they are not on it....
I recently published a book and within hours they had my portfolio duplicated and collect revenue under other names.
I graduated from college and they have me penniless, and in the gutter.
They have everything reversed and split the profits 50/50 with themselves.
I was the victim of identity theft.

nadine brown

March 20, 2009 12:58 PM

These people are scum of the earth.
These companies should be taken off the stock exchange today.. The End.
They should be prosecuted and arrested
I would love to see that on television
then we could understand their 50/50
They are linked to a media group that stole all my money
Media group as in a surveillance group.
I was an all american scholar and am pennyless and in the gutter..They stink.

nadine brown

March 20, 2009 1:34 PM

take these companies names off the stock exchange..

nadine brown

March 20, 2009 1:34 PM

take these companies names off the stock exchange..

Oakes

March 20, 2009 10:47 PM

C has some talent - not everyone is a deadbeat. Just as soon as C went back to its knitting, it posted a gain for 2 months (Jan and Feb). When they broke that news, both C and the market rallied. The stock went from $1 to $3.
If C were to stay with its knitting for two more months and post another gain, the share price would go from 2 1/2 to 5. If the rough-gem of the industry, BAC, were to do similarly, it would boost the sector and that would be worth another 1 or 2 points to C. We have to remember that much of the slide from $10 to $1 was due to short sellers and put buyers. It is a psychological thing. Reverse the psychology and the $1 share price returns to $10. Anything above $10 will have to be the result of focus, blood sweat and tears - which is the right thing to do.

Jake

March 21, 2009 12:52 PM

Before y'all think about shorting the stock after reverse split, read this from the same writer:

While reverse stock splits don't have a stellar track record, shorting companies who complete a reverse stock split is often futile. The short interest in these stocks is "essentially zero" two-thirds of the time in three-year period following the split because broker-dealers don't have them in their inventory. "You can't borrow them to sell them short," Goizueta's Rosenfeld says. "Even if you expect [the stock price to go down], you really can't profit from it."

Gimme a BREAK

March 21, 2009 1:04 PM

Toilet paper, by any other name....

Mark Medayski

March 21, 2009 9:25 PM

Economically it doesn't make any difference, but psychology is what counts this days. I think whatever C will do regarding a split of their shares, the stock will trade exactly as it should.
But I would preffer a lower priced stock as it guarantees to some degree wider moves in stock.
From 1$ to 1.15$ is like nothing now for C stock, but from 30$ to 34.50$ is quite different perception.
www.mkapital.com

George

March 22, 2009 8:41 AM

What happens to my covered option (s)each option written against 100shares I wrote/sold 2 options ????????????????????????????????????? Help me understand please please .

George E mail : transues@att.net

Robert

March 22, 2009 3:02 PM

Leave the stock alone until all dust is settled. C is on sale now. All we need is stable leadership. Not sure with Pandit with his loud mouth regarding the bonus issue. This is the time fro all C executive to keep their mouth shut, work hard and get shareholders' value gradually back.

tom

March 26, 2009 1:39 PM

Best not to let this happen. Current management recommends this. Not surprising. A $50 stock has been reduced to a $3 stock on their watch and they want to put that behind them. It is best for shareholders to keep this in their faces until such time as they can be removed. Multiplying or dividing numbers with no improvement in earnings is nothing but a card trick; the position of the common stockholder is not improved. It is an attempt to make an old sow look like a prize porker and it fools no one with a brain or a checkbook. VOTE AGAINST IT!

Jeff Paul Scam

March 26, 2009 9:12 PM


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riverrat49

March 31, 2009 8:56 AM

Everyone stop and think, if you had 500 shares it becomes 50 now when it's time for dividends instead of say $.22 a share at 500 shares you only get $.22 a share for 50 shares. Citi's slight of hand means $11.00 instead of $110.00 again remember dividends are per stock regardless of value. So how do they say "It's all Relative"

Basil

April 19, 2009 11:55 AM

Look what happened to RBS. They did a 20 for 1 reverse split and got the stock up from $1 to $20. Then the stock went down to $6 and now is trading at $9. Reversing the stock is a dumb move and most of its shareholders will dump it. Why buy Citi at $30 when you can buy Wells Fargo at $20?

Paul Roberts

April 21, 2009 2:32 PM

A reverse stock split for Citi actually is a good thing and will bring value to everyone who owns their shares. The reason is that ever since they dropped below $5.00 per share they have been unavailable to mutual fund companies which make up the largest portion of the market. If Citi does a reverse stock split and gets the stock price above $5.00 then mutual fund companies will be able to purchase Citi shares. Everyone knows Citi is undervalued and the stock is well poised for very good growth. Personal prediction: Citi will close the year out at or above $7.00 per share not factoring in a reverse split.

Cliff Downing

June 18, 2009 3:21 PM

As someone that has been watching the markets for a long time let me just say the idea of a reverse split, while great in theory, is actually a terrible idea.
The perception of a companies worth is what drives the stock price. The number of shares that are outstanding has only a small influence on this. Citi is down because the perception is that's what it's worth. I've seen many a reverse split where the stock returned to the low price per share within a short time after the reverse split.
So, the theory is great but it doesn't work in reality.

JAMIL ATHAR

June 21, 2009 1:12 AM

REVERSE STOCK SPLIT IS NOT A GOOD IDEA,
BETTER KEEP IT AS IT IS NOW, HOPE VERY SOON C $3.00 WILL BE C $12.00, IF WANT TO MAKE MONEY, THIS IS THE CHANCE, BUY NOW..........

nair

June 30, 2009 5:30 PM

Historically, reverse stock splits have never worked out and the term itself dooms it to failure. There are many examples, most recently was Nortel Networks whose many reverse splits ended in the company filing for bankruptcy, once worth $300 billion, closing out for a few hundred million. A 10 to 1 reverse split went from over $20 to 18 cents. Hedge Funds love to short a stock like this, because the returns are greater the higher the stock price. IMHO

Anatole Geiche

July 2, 2009 1:54 AM

If the C management ever only considered a reverse split and foolishly let this rat, this stupid thought out of bag, then no wonder the C stock is in such big trouble. At this point, they should better, and first of all, clarify this matter.

Anatole Geiche

July 2, 2009 1:54 AM

If the C management ever only considered a reverse split and foolishly let this rat, this stupid thought out of bag, then no wonder the C stock is in such big trouble. At this point, they should better, and first of all, clarify this matter.

steve kell

July 8, 2009 5:06 PM

just take a look at AIG,it is now $13 and fallen,then tell us that the stock should reverse split

Sheryl Michael

July 10, 2009 8:26 AM

The best thing to do is to get rid of Pandit.......I'm tired of losing my butt on this stock.

Wil Rahmer

July 10, 2009 3:15 PM

Reverse stocks scream out distressed under performing company, with a dose on failed reverse mental torture. Making a stock available to stock screeners filtering out penny stocks tricks no one into thinking a company is more valuable. Suck it up and improve the company; Quit the shenanagans with revers stock splits.

Ernst Benjamin

July 15, 2009 8:21 PM

It would be a good idea,if it is a 4 for 1

Joe

August 7, 2009 9:28 AM

AIG did a 1 to 20 reverse split and the stock dropped almost 50%. It is now recovering, but is it worth $26. I don't think so. A reverse split might appeal to the new investor but the current investor loses volume and money on each gain and dividend. Now Citigroup is talking about doing a reverse. I will bail before I go through this again. The stock is valued at what it is. Let the market decide the value, don't inflate it.

Citi Trader

August 9, 2009 9:26 PM

Read the proxy, vote the reverse split down!!

Citi Owner

August 14, 2009 3:23 PM

I second that vote AGAINST the reverse split! I hold some AIG stock as well. In my opinion, keeping the stock where it is, will allow people who normally wouldn't invest in a company to buy in and try to make a little money with the stock. HELLO....Isn't that why we invest to begin with?? You have to buy big to make big right? The average Joe isn't buying a million shares, he's buying 100 or 200. So, yes it might take a little longer to get the company back up to what Wall Street considers a "respectable" share price, but the potential for new investments is far greater this way. Knowing what I know now about how Citi operated their business (they were on the verge of bankruptcy, right?), I wouldn't spend over $3 or $4 a share anyway! The whole reasoning behind thier board wanting this is just plain BS. The amount of debt remains the same no matter how many shares it represents.

Tom

August 20, 2009 12:38 PM

You can't change an old sow into a prize porker by sprinkling the dust of two bat's wings on it. Us investors have been failed by this management and by our government officials who enable this crap. We should get rid of the likes of Michael Armstrong who knows more about selling hardware than economics our sound business practices. We should not allow management failures to be minimized by manipulation of paper values. And we should all VOTE.

gerry norskog

August 21, 2009 12:31 AM

reverse splits are for the millionaarrries not the small investers like me thank you....

gerry norskog

August 21, 2009 12:31 AM

reverse splits are for the millionaarrries not the small investers like me thank you....

gerry norskog

August 21, 2009 12:31 AM

reverse splits are for the millionaarrries not the small investers like me thank you....

gerry norskog

August 21, 2009 12:31 AM

reverse splits are for the millionaarrries not the small investers like me thank you....

gerry norskog

August 21, 2009 12:31 AM

reverse splits are for the millionaarrries not the small investers like me thank you....

gerry norskog

August 21, 2009 12:31 AM

reverse splits are for the millionaarrries not the small investers like me thank you....

gerry norskog

August 21, 2009 12:31 AM

reverse splits are for the millionaarrries not the small investers like me thank you....

gerry norskog

August 21, 2009 12:31 AM

reverse splits are for the millionaarrries not the small investers like me thank you....

gerry norskog

August 21, 2009 12:31 AM

reverse splits are for the millionaarrries not the small investers like me thank you....

gerry norskog

August 21, 2009 12:31 AM

reverse splits are for the millionaarrries not the small investers like me thank you....

theo

August 24, 2009 4:34 PM

reverse stock splits only guarantee dilution nothing more. the prospectus even threatens retaliation if the split is turned down.you even lose voting rights.read it. it is not hard to understand. this administration is trying to save their own skins at the expense of the common stock holder especially one who has had their stock for over a few years.call the company and ask them to explain the upside to you . I'm sure there is none.

texas retired

August 31, 2009 9:55 AM

I have been through reverse stock splits with other companies and it really does not improve the stock price over the long haul. All it does is screw the smaller investor and they end up with nothing in the end. I voted no on the reverse split recently and I hope the larger investors did too. It is time the stock holders of Citi take more control and stop the madness coming out of the CEO and Chairman's office.

jon

September 17, 2009 2:36 PM

Im selling my whole package, this is bulshit 10000 pieces

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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