Shares of Citigroup Inc. (C) were ultimately in the mid $40 range this Monday, the first time since late 2007. No, it’s not an appreciation of the stock price but the result of a 1-for-10 reverse stock split that became effective after the close of trading on May 6.
The financial crisis, which led to significant losses at Citi and resulted in the company taking a huge bailout from the government to avoid failure, resulted in a major plunge in its stock price since late 2007. Following the bailout, Citi had to issue common stock to support its balance sheet that led to skyrocketing share count numbers.
This fall in Citi stock price, however, cheered retail investors who could win a Citi stock at a much lower price. Traders who intended to make some quick gains by frequently trading on the stock particularly favored it.
However, the reverse stock split not only reduced the share count to 2.9 billion from 29.1 billion, but also removed the single-digit stock price stigma for Citi. In spite of positive developments like profit and balance sheet improvements, the Citi stock remained somewhat range bound and traded below $5.
In fact, this increase in the Citi price, though through a cosmetic way, is to lure institutional investors as some of institutions do not buy shares trading in single digits. Also, the quarterly dividend reinstatement of 1 cent following the reverse-split is to attract institutional investors who do not buy stock that pay no dividend. So, it is basically an effort to broaden the range of investors who would hold the Citi stock.
Moreover, with its peers such as JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS) trading in the double-digit range, the reverse split was an obvious choice for management to increase the stock price from the single-digit range. A ten-fold increase in the stock price, though superficially with the reverse split may attract investors focus on Citi once again.
But did the reverse split benefit investors? While investors may gain in the long term, they could not profit yesterday. The shares reported a 2.3% fall in the regular trading season on the New York Stock Exchange.
Besides Citi, American International Group Inc. (AIG), the stock of which was also substantially affected by the financial crisis, had to resort a 1-for-20 reverse stock split in July 2009. After seeing a good tempo in the initial year, the stock price again declined in the recent months.
Nevertheless, Citi’s core business, Citicorp, remains alluring and its unique franchise allows clients to access high growth foreign markets. While the top-line headwind continues at Citi, the continuation of the rundown of its legacy problem assets would free up capital for the company and help invest in its core business. Lesser exposure to private-label mortgage put-back risk and an improvement in the overall economy would help in augmenting its earnings in the days ahead.
Citi shares maintain a Zacks #3 Rank, which translates to a short-term Hold recommendation. Our long-term recommendation for the stock is also reiterated at Neutral.
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