During difficult financial times, many companies have seen their stock prices pushed to historic lows. In the financial services industry, the banks have been battered to below book value in many cases, and firms like Citigroup (NYSE: C) are trading at a small fraction of what they did just three years ago. As a result, firms sometimes resort to rarely used measures to boost public perception of their stock price, rather than focusing on building the financial fortitude that would normally lead to increasing stock prices.
Earlier this week, Barclays (NYSE: BCS) Capital analyst Jason Goldberg wrote “With the government now out of its common equity stake, we wonder if [Citi] announces its long awaited reverse stock split in conjunction with [fourth-quarter 2010] earnings.” As Citigroup’s shares continue to hover around the $5 threshold, institutional investors have been wary of it. The theory goes that a reverse stock split of 1:2 would lead to a nearly $10 share price, or a 1:4 could leave to a $20 share price. This could have a positive psychological impact on investors, even if financially their earnings power and claim on dividends was watered down as a result.
Skeptics often dismiss reverse splits as merely another form of equities market alchemy, however, it seems to have worked for AIG. AIG orchestrated a 1-for-20 reverse split back in July 2009, and the stock has continued to trade around it’s higher range. What Citigroup does in the coming weeks is still not clear, but Pandit and team remain under intense scrutiny to show the much needed turnaround.
