Citigroup’s Dividend Reinstatement & Reverse Stock Split

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.

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7 Responses to “Citigroup’s Dividend Reinstatement & Reverse Stock Split”

  1. avatar DIY Investor says:

    I agree. Citigroup should concentrate on running the bank and forget the reverse split.

  2. avatar RobberBaron says:

    It is what it is. A machination to get the stock back on some automated systems. Can’t get bought and sold in bulk if the systems don’t recognize you.

  3. The only way Citi can reinstate a dividend if is they reverse split. They are doing a 1 cent payout on the reverse split shares. If they don’t reverse split and still pay out a 1 cent dividend, then that’s 10x more of a dividend payout. The reverse split seems like the only way they could reinstate the dividend quickly. Add dividend reinstatement to mutual funds being comfortable with buying C, and I think the stock is looking better after the split than it was before.

  4. avatar optionsdude says:

    Very good points. It is simply a psychological maneuver. Does it work or change anything? Not a bit. Will some people be confused or impressed that Citigroup is trading higher? Yes, some will. Overall, a non-event. Paying dividends and making profits are the only things that will help.

  5. I have about 1,000 shares of Citi that I have been holding onto for awhile now, it has since gone up considerably…but I am worried and skeptical about the reverse stock split too. I lost a lof of money on Flagstar after they did the same thing last year.

  6. avatar Ibrahim says:

    Good informative articles here and really good questions to ponder over. Here is an excerpt I found on why to invest in dividend paying funds:

    Dividends are a way of rewarding shareholders who hold on to a company’s stock. The best measure of a company’s performance is cash flows & the company that can make stable dividend payments over many years & be able to pay all operating & capital expenses is the best investment you can make. Here are some more advantages of dividend paying mutual funds:

    * Dividends add up over time – In fact over the last 25 years, the S&P 500 Index has gained 914%. If you add re-invested dividends, it soars to 2000%
    Source:

    * Dividends are tax-efficient – Interest gained from a Guaranteed Investment Certificate (GIC) at your local bank is taxed at your income tax bracket, which can be as high as 35%. Qualified dividends however are taxed at lower long term capital gains rates, which is 15% for most investors.

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