Monday, September 5, 2011

What does Citigroup's reverse stock split mean for investors?

Monday, September 5, 2011

Q: I'm excited about the upcoming split in Citigroup's shares. When did it happen and what does that mean for the stock?

  • A customer leaves a CitiBank branch office on April 18, 2011 in San Francisco.

    By Justin Sullivan, Getty Images

    A customer leaves a CitiBank branch office on April 18, 2011 in San Francisco.

By Justin Sullivan, Getty Images

A customer leaves a CitiBank branch office on April 18, 2011 in San Francisco.

A: Investors who recall Citigroup's (C) strength and dominance in the 1990s can't help but do a double-take seeing the stock trading for less than $5 a share as they did this year until May 6.

The fact shares of one of the largest U.S. banks traded for less than $5 a share is a startling concept on its face. But given the strain the financial system came under during the financial crisis and Citigroup's big role in the mortgage mess, it doesn't take long to see why Citigroup's value has plunged to $124 billion.

But in an age when having a high per-share price is trendy and prestigious, think of Berkshire Hathaway (BRK.A) at $121,020, Apple (AAPL) at $346.57 and Google (GOOG) at $535.05, it's not surprising that Citigroup is eager to shed its rap as being a low-priced stock.

The best way for a company to drive its share price higher is by boosting revenue and earnings. Eventually, investors will recognize the rising cash flow and earnings and push the stock price higher. But, barring that, the easiest way to get a stock price up, without making any underlying improvements to the business, is with a reverse stock split.

In a reverse stock split, a company simply reduces the number of shares outstanding. Doing so, by definition, increases the per-share price of the stock. Citigroup did just this after the stock market closed on May 6. The company executed a 1-for-10 reverse stock split, essentially replacing every 10 shares of stock with just one share. This maneuver reduced the company's number of shares outstanding from 29 billion to about 2.9 billion. And in theory, that would make Citigroup's per-share price rise from about $5 a share to about $50 a share.

But what does this mean for investors? Absolutely nothing. Even after the per-share price of Citigroup rises, since investors have fewer shares, the value of their stake in the company remains the same.

For instance, imagine if you owned 1,000 shares of Citigroup at $5 a share before the reverse split. Your stake would be worth $5,000. After the split, your shares would be worth $50 a share, but you would only have 100 shares, for a total value of $5,000.

Citigroup's reverse stock split is just an accounting maneuver. Real value will only accrue to investors once the company starts to boost its financial results.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at To submit a question, e-mail Matt at Follow Matt on Twitter at:


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