Citi Reverse Stock Split: Is It Good for the Stock?

This is a comment left by nt on my post on Citi stock purchase:

I heard that citi group is reverse splitting the shares. Is this good for the investors?

Before talking about what a reverse stock split is, here’s a story of one stock I used to own which did a reverse stock split in the past. The stock is Nortel Network (NT). After falling into the same category (price wise) where Citi stocks belong in today, NT did a 10:1 reverse stock split in December 2006, boosting the share price to some $20 a piece. On surface, $20 a share looks much better than $2/share, but that’s the only thing the reverse split did for the stock. Two years later, NT filed for bankruptcy protection.

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OK, now what is reverse stock split? According to the SEC, the definition of reverse stock split is:

A reverse stock split reduces the number of shares and increases the share price proportionately. For example, if you own 10,000 shares of a company and it declares a one for ten (1 for 10) reverse split, you will own a total of 1,000 shares after the split. A reverse stock split has no affect on the value of what shareholders own.

That’s enough to say what a reverse stock split is. Then why do companies reverse split their stocks? The SEC has a perfect reason for that as well:

Companies often split their stock when they believe the price of their stock is too low to attract investors to buy their stock.

As for Citi, a reverse stock split probably won’t do the stock any good, except making the price look nice. And as it happened to other stocks, reserve split signals trouble at the company (well, we don’t need any more signal to know Citi is in trouble), therefore, it’s time to get out.

That said, I am going to hold on my Citi shares :)

Update (March 21, 2011): Citi to conduct 1:10 reverse stock split in May and pay dividend.

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6 Responses to “Citi Reverse Stock Split: Is It Good for the Stock?”

  1. Tim |  Mar 23, 2009 at 4:56 pm

    it will only be good if it prevents institutional investors from being forced to drop the stock. I read somewhere that institutional investors were going to wait until June to determine to drop citi stock if it fell and stayed below the $5 mark.

    i thought companies split stock when they believe that the stock price is too high attract investors, unless they are talking institutional investors.

  2. frugal living |  Mar 24, 2009 at 1:45 am

    Stock splits generally are on a two-for-one basis (two shares of new stock are made exchangeable for one share of old). For example, a two-for-one split would leave the owner of 100 shares of old stock worth $90 per share with 200 shares of new stock worth $45 per share. All a split actually does is increase the number of outstanding shares.

  3. the weakonomist |  Mar 24, 2009 at 10:28 am

    This may be a reaction to the Dow’s consideration of dropping Citi from their list. They hadn’t had penny stocks in the Dow before and it made everything look bad.

    A reverse split is superficial at best, but in a superficial world it could help.

  4. Jae Jun |  Mar 28, 2009 at 9:12 pm

    Since most institutions are not allowed to buy or own companies that are below $10, it should prevent some from selling their positions. Doesn’t add value at all but many investors are fooled into thinking it is worth more.