Citigroup (C) will be splitting its stock soon. CEO Vikram Pandit is tired of seeing his company’s shares languish below the $5 level. Pandit has announced plans to authorize a reverse split of the company’s stock. Every 10 shares of Citigroup will be worth 1 share once the split is finalized. Based on this past week’s closing price, shares would be valued around $45 a share. So, why is Citigroup doing a reverse split?
Citigroup Reverse Stock Split
Citigroup is trying to make its stock more attractive to mutual fund companies and other institutional investors. Most fund companies and pension funds avoid investing in companies whose shares are priced below $5 because these penny stocks are often viewed as too volatile. The company is also trying to stop speculators and sellers from shorting the stock. They believe that these groups are holding down its shares.
I think that a reverse split is a bad move for Citigroup. If the market sentiment is bearish on a stock then short sellers will drive the stock down at $40 a share just as they did at $4 a share. This seems like an unnecessary move. The company was just starting to get things back on the right track by selling off unprofitable assets and restoring its dividend.
Former Dividend Stocks Favorite
Citigroup had just reinstated its dividend again and is starting payments at 4 cents annually. It is a low payout but it is a start in the right direction. If the bank’s capital levels were deemed inadequate, the regulatory agencies would not have approved any payout whatsoever. Citigroup plans to increase its payout throughout next year. Hopefully, the company can rejoin the ranks of quality dividend stocks in the future.
I like Citigroup’s stock but I do not expect the reverse stock split to have a major impact on its shares. AIG had a reverse stock split a year ago and it has done nothing to reduce its volatility. The key to growth in the share price will be earnings improvement and the return of capital back to shareholders via buybacks and distributions.