Citigroup Announces 1-for-10 Reverse Split

Good news! Citigroup‘s (C) stock will soon be over $40 per share.

Bad news: It’s happening the wrong way. Citigroup has announced that it’s doing a reverse stock split. That means that for every ten stocks you own now, you’ll have just one after. The company will also start paying a dividend of ONE PENNY per share!

There’s an odd belief that quality stocks need to have higher share price. I think Wall Street deems it’s a bit gauche when your stock can’t break $5. Citigroup closed on Friday at $4.50. The stock has mostly bounced between $3.50 and $5 for the past 18 months.

I’m always amazed at the attention investors pay to the actual share price — not the value — but the nominal price. I often hear investors say that they don’t like stocks over $50 or $60. Why? It makes no sense.

People automatically think a $12 stock is somehow a better buy. It’s not. The nominal price makes zero difference at all to how it will perform in the future. It’s not like a reverse stock split somehow fools investors. The only thing I could say about the share price is that a very low-priced stock will probably be a lot more volatile.

Two years ago, a certain insurance stock had a 1-for-20 reverse stock split. That raised the nominal share price, but it hasn’t magically transformed it into a better performer.

Two years ago, Citi was kicked out of the Dow. I’m curious what a 1-for-10 reverse split would do to the Dow’s divisor. This is the number that the company has kept for over 100 years to calculate the number for the index. You add up all 30 stocks and divide by it to get the index figure.

Also, due to Citigroup’s low share price and large outstanding share base, the stock is a favorite among the High-Frequence Trading crowd.

Citi often trades an average of 20,000 shares per second during the trading day. On December 9, 2009, Citi traded more than 3.7 billion shares. That’s about 13% of the number of shares outstanding. It also averages about 161,000 shares per second for the entire trading day.

I imagine a 1-for-10 reverse split will cause a fall-off in volume of much more than 1/10th.

Posted by on March 21st, 2011 at 7:30 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.