Citigroup Makes Like a Backwards Banana

Henry Truc |

If you haven't heard the news yet, embattled bank Citigroup (NYSE: C) announced that it would do a 1-10 reverse stock split. For beginners, that means the company plans to turn it's 29 billion outstanding shares valued at about $4 a pop into 2.9 billion shares priced at about $40 per. On paper, splits and reverse splits aren't supposed to have any effect on the company's value, but to the naked eye, shares of Citigroup suddenly look 10 times more valuable because of its significantly higher price per share. In addition to the reverse split, Citigroup also announced that it'll start paying a dividend again. The company plans to pay its shareholders a penny per quarter for their investment. Without the reverse split, the dividend would really only amount to 1/10th of a penny per share, but then again, any dividend is better than no dividend.

Shares of Citigroup have been trading down about 1.5 percent since the announcement, but generally speaking, analysts agree that the reverse split will help the financial firm attract more institutional investors, scare off retail ones and help reduce the stock price volatility. Total trading volume may be affected negatively, however, since Citigroup has been the most traded stock on the market, the reverse split could cause a 5 percent drop in total U.S. equities trading activity.

Rosenblatt Securities said in a note that the reverse stock split could have negative implications on U.S. equity since it is one of the most actively traded stocks, meaning there would be less trading when the price increases. An analysis by the firm estimates that five percent of the total equity volume could be impacted by the reverse split.

"We believe that a C reverse split stock would blend elements of both the AIG (NYSE: AIG) and [Bank of America (NYSE: BAC)] experiences. Looking at the reverse split of AIG, it's clear that the huge increase in share price and proportionate decrease in the number of shares available to trade contributed to the 76 percent decline in average daily volume post-split," the note by Rosenblatt said.

That said, there were 14 companies in the S&P 500 that completed reverse stock splits in the past decade. Of those, 12 had higher stock prices one year after their reverse split. The average gain? 62.55 percent. So shareholders have that to look to. But then again, a higher price also means more attention from the dreaded short sellers, according to CLSA analyst Mike Mayo.

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