Citi to Conduct 1:10 Reverse Stock Split and Pay Dividend

At the peak of the financial crisis in 2008, Citigroup, one of the largest financial institutions in the country, had to be bailed out by taxpayers to prevent it from collapsing. In total, the bank received $45 billion from the government through the TARP bailout fund, of which $25 billion was converted into 7.7 billions Citi shares at $3.25 apiece, making the government the largest holder of Citi stocks. The government’s bailouts of “too big to fail” banks like Citi and Bank of American, which also received $45 billion aid, was much criticized, but the investment itself was a success, if looking only at the return. When the Treasury unloaded all the shares of Citi it still hold last December at $4.35 a share, the government had received a total of $57 billion proceeds from the sale, that’s $12 billion profits in just two years. While the government made a huge profit from selling Citi stocks (C), it also flooded the market with billions of Citi shares. Google Finance data shows that there are more than 29 billion Citi shares outstanding, nearly three times the number of outstanding shares Bank of America (BAC) has.

As the bank becomes healthier again, it also looks to reinstate dividend payment, which has been stopped since 2009. Some of the nation’s largest banks, such as JPMorgan Chase and American Express, have already announced last week that they are also restarting or restoring dividend payouts.  For Citi the implementation of the dividend payout plan may be more difficult because of the large number of  outstanding shares. To make any dividend payout meaningful, it makes sense to reduce the total number of shares. And that’s exactly what the bank is planning to do first.

The WSJ says early today that Citi will conduct a 1:10 reverse stock split after the close of trading on May 6 and on May 9, the stock will be traded on a split-adjusted basis at the opening. The split will reduce the total number of shares to 2.9 billion, a much more manageable number.

Usually, a reverse stock split is not seen as a positive sign to the a stock because it’s usually implemented as a way to halt the stock price from going too low to attract investors. I have been through a few reverse splits in the past and none of them have survived  after the split (well, except AIG which I still own a few shares). For Citi, it may be a little different because the main reason for the split is reducing number of shares, not boosting share price. If that is indeed the case, the trading of C stock certainly doesn’t show anything positive, even after the announcement of 1-cent quarterly dividend starting the second half of this year. The stock is down nearly 1% after the news at $4.47 a share.

Maybe investors just don’t like the one cent dividend payout after having their shares reduced 10 times.

Do you think Citi stock is a buy now?

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