Citigroup Announces a 1-for-10 Stock Split

Earlier today, Citigroup announced that they were going to do two things: reinstate their quarterly dividend and complete a 1-for-10 reverse stock split.

After Citigroup made their announcement this morning, my inbox was lit up with emails. Most of these emails were asking the following two questions: Why is Citigroup doing a reverse stock split, and is a reverse stock split a bad thing?

Lets start with the first question.

Citigroup is doing a reverse stock split for one reason - they want to encourage buying from big investors such as pension funds, etc. Many of these "big" investors are not able to purchase stocks that trade for less than $5 (C is currently trading at $4.39). So, if C does a 1-for-10 stock split, all of a sudden their shares are trading at $43.90 instead of $4.39, and many pension and mutual funds can suddenly buy Citigroup.

Now - is a reverse stock split a bad thing?

Lets say this - companies who initiate reverse stock splits are usually in a very tough spot. In most cases, companies who announce reverse stock splits are looking to maintain their listing on an exchange (in order to maintain your listing on the Nasdaq, for instance, a company needs to maintain a minimum bid price of $1). So, if a company is trading for 75 cents per share, they could enact a 1-for-10 reverse stock split in order to maintain compliance.

So, the reverse stock split is a "good" thing in that it maintains the company's listing, but its a "bad" thing in that the company was doing so poorly that they needed to do a reverse split in order to maintain their listing.

Ive followed reverse stock splits closely for over a decade now, and most stocks continue trading down after completing the split. I mean, it makes sense, as the reverse split does NOTHING to change the company's financial position, etc. If a company was struggling before a split, then they will still be struggling after the split.

This move certainly makes sense for Citigroup, but they are only doing it because their shares are trading at such a low level, which is never a good thing.

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