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?
Businessweek’s Emily Thornton, Amy Feldman, Ben Levisohn, and Ben Steverman focus on matters great and small for investors, from the views of a hot fund manager to an explanation of the latest products devised by Wall Street’s rocket scientists. Exploring trends in any area, from bonds and stocks to closed-end funds and futures, always with an eye towards giving investors a better understanding of the sometimes confusing and often chaotic world of finance. 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.