AIG Proposed Reverse Stock Split: Shareholders Should Vote This Down as a No-Brainer
As I mentioned in another article, I returned to the stock market in March after a long absence to take advantage of the very low stock prices of large companies. So far so good with my choices, Citigroup and AIG, as both have produced good results. In spite of the dire warnings of stress tests and the difficulties these and other financial institutions have endured during the financial crisis, in less than two months I doubled my money.
The market turned around somewhat and the stocks went down in the last month, but nowhere near where they were when I bought them, so I'm still making 50% on my investment after only three months.
I figured that with these two giants and with the money the government loaned them in the Stimulus Package to avoid bankruptcy, that they'd eventually move back up considerably from the low to high one dollar range at which I bought them. In particular, because Citi was selling for $27 last year and $56 the year before, and AIG had a price of $31 last year and over $70 a couple of years ago. Slow and steady, the economy is improving and with patience I think I'll be proven right.
However, my beef with AIG is with the recent proxy statement they sent through my broker for the Stockholders Meeting this coming Tuesday, June 30, wherein, among other things, they want to do a reverse stock split of 1:20, meaning that if you had 1,000 shares you'll wind up with fifty. If you had ten thousand shares you'll have 500. They will initially multiply the share value by a like amount, so you won't lose any equity, but your chances of growing your investment have become pretty slim.
The insurance company's rationale is that, because their stock is valued so low -- it just sold for $1.46 -- it has lost institutional investors, many of which will not buy a stock that is priced under five dollars. But worst, they ominously warn, if the stock falls below a dollar as it did up until a couple of months ago, the New York Stock Exchange may delist them. The fact that the stock rose to over two dollars and has never declined below the mid one dollar range in over two months would appear to make this concern overstated.
However, what mostly bothers me as a small-time investor is that by reducing the number of shares by one twentieth, if the company prospers to a much higher level of equity, the shareholders will not see their investments grow nearly as much because the increases of the share prices would have to rise at astronomical rates per day or week to effect the same profit margin. For example, if -- to round things out -- the share numbers are cut by twenty, they will raise the price from $1.50 to $30. It is much more reasonable to expect that the $1.50 might rise to, let's say $20 eventually -- considering the heights from which it previously fell -- than for a $30 stock to get to $600 a share, which it would have to achieve for someone with fifty shares to reap the same results as the person who originally had one thousand shares if the stock climbs to $20.
Plus, with an inflated price of $30 and considering the recent economic struggles of AIG, how many institutional brokers are going to want to pay that much for a company not yet back on sound footing? What I find interesting is that, in the proxy statement, the Board of Directors does not warn against this risk. They only tell you the reasons they want to reverse split the stock, and cover themselves slightly with "In addition, the reverse stock split may not increase the price of AIG Common Stock or may not lead to a sustained increase in the price of AIG Common Stock, which would prevent AIG from realizing some of the anticipated benefits of the reverse stock split." Interestingly they don't spell out the real danger, which is that the stock would now have greater room to free fall and the shareholder would have much fewer shares to cushion the blow.
Then, to top it off, they go on -- amazingly with a bit of cheek, I think -- to say "the reverse stock split may not result in a stock price that will attract investment funds or institutional investors or satisfy the investment guidelines of investment funds or institutional investors." But wasn't that one of their prime enticements to do this? Is this a shell game they're putting before us?
Not to mention another desired goal is to increase the potential or "authorized" shares of common stock by another five billion or so, which, if ultimately sanctioned by the Board, would dilute everyone's shares still further.
And, as stated, the Board of Directors doesn't at all address the realities as stated above that the gross reduction in shares for each stockholder provides much fewer possibilities for upward movement each day. Wells Fargo which sells at the mid-twenty dollar range only went up 7 cents today. AIG and Citigroup have done that many times and more from a vantage point of $1.50 and $3.00. IBM, which sells for $105 went down 38 cents today. Sometimes it shoots up or goes down a few dollars, but my point is that the market is such that the movement of a stock suddenly priced at thirty dollars is not going to generally move up and down proportionally to its previous price, and with fewer shares you have much less room to grow.
I bought AIG at $1.15 and within a month it shot up to over $2 -- that's almost double. How fast do you think AIG will go from $30 to $60, barring an amazing stock story? And yet the Board of Directors, who will probably win this fight, because there were no opposing statements on the Proxy Ballot and no negative publicity on NBC, CBS, ABC, CNN, CNBC, Fox News, MSNBC, The Today Show, Facebook, You Tube, Twitter or anywhere in the press that I've seen, will have achieved a sleight of hand, which will not only hurt me but, much worse, the many stock holders who bought the stock at much higher rates before it plummeted.
Those folks, who bought AIG at fifty bucks or seventy bucks and had a few thousand shares or so, then saw the price go below a dollar, have held on and continue to hope for some sort of a recovery. What chance do they have if their 10,000 shares are reduced to only five hundred?
If anyone has AIG stock and has not yet voted or has a chance to do so, I would absolutely urge them to vote this reverse stock split down and also the attempt to issue five billion more common shares. But remember the proxy has to be voted before 11:59 p.m. Monday night, June 29.
For the future, I'd suggest that if some kind of a reverse split is necessary to ensure NYSE listing that it be limited to 1:3 or 1:4 to get the price over the five dollars needed to lure institutional funds back into play. This 1:20 split smells -- to me -- a bit too rancid for the ordinary shareholders, not to mention the U.S. public who are hoping to recover their investment.
Michael Russnow's website is www.ramproductionsinternational.com
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
See Michael Russnow's Profile
Here is hwy61x's reply, because it's attached to some others and might be hidden to future readers. It refers to my recent comments, though he conveniently skirts my main point:
"Wrong. This is the direct quote from my original post:
'Using real numbers, investors are currently valuing AIG COMMON STOCK (important distinction) at almost $4 billion. There are 2.7 billion shares outstanding and the stock is trading at $1.46 per share. Given the US Government owns 80% of AIG, leaving common shareholders to own ONLY 20% of the company, that puts a value on the entire company of over $20 billion. But that doesn't tell the whole story - there is over $150 billion of debt on AIG's balance sheet. If you're another company, looking to buy all of AIG, you'll care about the debt (after all, you'll have to pay that off at some point). Thus, the entire company is valued at (in round numbers) $170 billion!!!!"
My point was YOU DON'T HAVE LESS OF ANYTHING if teh (sic) stock reverse splits. It's PURELY OPTICS. Yes, a reverse split will speed up the re-valuing of a stock because institutional investors are now dominating the buying/selling, but it's just speeding up the inevitible. (sic) AIG was valued at $170billion at $1.46/share. THE REVERSE SPLIT DIDN'T CHANGE THAT. You're whining because you're a speculator, not an investor. Investors are in control of the value now, so I suggest you go play with another penny stock."
See Michael Russnow's Profile
Hwy61x, it's amazing how you're so obstinate against clear evidence. I never said reverse splitting didn't keep the equity the same. You keep repeating that to mask the fact you were wrong. The reverse split -- and the split alone -- caused most of what just happened to AIG's current value. Financial commentators agree with me.
Yes, the equity remained the same -- for an instant -- but the ploy, to pretend the stock was worth much more and would attract institutional investors, was transparent. They didn't bite and those that were left folded along with "speculators" to whom you condescendingly refer. The latter group was probably not thrilled having 1/20 of the shares (a cosmetic thing I admit), but more importantly because they'd lost confidence in a company clearly not playing with a full deck.
Plus, as I said below, institutional investors could have been selling all along and didn't need the stock to rise to a higher price, yet they clearly hadn't done so for three months, because the price increased by six fold. It started falling somewhat with some negative news, but then came back and only began plummeting when the stock split. Nonetheless you keep stating it was only a coincidence!
Keep writing with such confidence, though. It's almost as if you're a flack for AIG or a member of their board, so at least they're saving that salary.
I still hope that Citigroup is paying attention and will halt plans to reverse split as well.
The reason for my initial post was a response to the misconception that many investors have, and that you promulgated when you stated that you bought AIG because it was at $31 a year ago and over $70 two years ago. The misconception is that the price per share tells you anything about the value of the company. $70 two years ago vs. $1.46 a couple weeks ago is not an apples to apples comparison - THE GOVERNMENT TOOK AWAY 80% OF THE COMPANY FROM YOU. Thus, my point was (and is), a reverse split doesn't take anything away from you. It could speed up the inevitible by transferring the supply/demand dynamics of who is trading the stock from retail / speculators, to institutional investors. The reason for this is most institutions don't traffic much in penny stocks because of the high frictional costs.
Let me state, for the record, that I don't disagree with your sentiment that the AIG reverse split was a joke if they did it thinking it would help the stocks valuation. I suspect, however, that despite what you and many other commentators have opined, AIG did the reverse split so they didn't get delisted, which would be an eventuality if AIG stock traded below $1.00 per share for a certain period of time.
hwy61x what do you think about what you have been saying now look at were it is after the split. a stock that is in troulbe like aig is not going to trade at 20 to 30 a share in these times by cutting the number of shares because now there is a lot more down side to short the stock and people on wall street can control that. this does not leave much for the little guy and guess what the little guy is not the one who caused all these ballons and bust.
Please re-read my comments regarding the overall valuation. The stock has made the transition from a pure speculative stock to being valued like a going concern. As I pointed out earlier, the valuation applied to the company, even trading at $1.40 or wherever it was, appeared to be far too generous. Regardless of whether AIG reverse split or not, over time, the market would value the company appropriately. Having a stock with a double-digit price just means more institutional investors will be buying / selling the stock, vs. purely retail speculators, and thus, the value correction will happen more quickly, as we're seeing now.
See Michael Russnow's Profile
hwy61x, forgive my strong response, but what you are promoting is sheer crap.
Your initial comments re my "ignorance" don't hold too much water in light of what has happened.
The reverse split was supposed to excite institutional investors, which were not able to buy a stock at a very low price. The low price didn't inhibit them from selling it, re your comment "Having a stock with a double-digit price just means more institutional investors will be buying/selling the stock..."
This stock is tanking BECAUSE of the reverse split -- it lost another $2.44 today -- down from its split price of $23 a week ago. People are dumping it, because they're not happy with having 1/20 of what they had (a wrong move I think) or they think -- a more legitimate sensibility -- that the AIG Board perpetrated a very transparent con job that no one is buying -- literally.
Otherwise -- if you are right -- all this is amazingly coincidental, i.e. the moment the stock reverse split all this happened. Sorry, but you will never get me or common sense thinking people to believe it.
AIG should be investigated by the government, which will suffer the most by their ineptitude and if at all possible a class action suit should quickly be forthcoming.
No wonder Ed Liddy is getting out of Dodge!
I just pray that Citigroup, which is considering a similar reverse split move, is watching all this unfold without their blinders on.
See Michael Russnow's Profile
I might add, re my response above, that the reverse stock split was greeted with the same ominous predictions I put forth last week by many financial writers, including Jeanine Poggi of Street.com and David Goldman of CNNmoney.com.
The stock market is no place for the little people. I think they've learned that it's something to avoid. The only time I ever put any money intoin my life was when the stocks were way down, and I quickly sold most of it again when it went back up. We live under a system that is set up to screw the little person, so it's best not to play into it at allif it can be avoided. Credit cards are the same. I have quite a few on paper, but in reality I cut all of them up a long time ago and use only one when I have to. I don't believe in buying anything on credit, and I will never trust the stock market or big banks and corporations.
Michael,
With your understanding of economics you should run for senator.
See Michael Russnow's Profile
Well, econ1, the ones who really understand economics are and have been at the highest levels of our government or have just been sentenced to jail for 150 years.
Considering our present state -- and that of AIG and other stocks -- perhaps a more common sense approach is needed. With respect to your short comment, I choose to be a silly Pollyanna and see that the glass is half full re your review of my thoughts, and I'll also be happy to take your vote.
wish i had found your article sooner got have been watching aig for sometime for it to drop again and got it for 1.14 a share yesterday read about the votes but it didn,t say anything about the stock split .what a shock this morning. i could not beleave that they did this because before i read your blogg i was trying to find out what was going on with the stock and tdameritrade had not changed the ticker and i could not get out before stocked dropped to 18.50 . i feel i am stuck for a lease a couple of days now to se what it will do but this move was nuts because in these times this is in no way a 20 to 30 dollar a share stock witch is nick named the worst company in the world . its a 1.00 to 3.00 dollar a share stock and i do not think any funds will think so . bummer big time!
How many shares of AIG stock are American consumers currently in possession of, and how many will they have once this plan is pulled off? What will be the value before and after?
Michael-
Speculative investments by their very nature are high risk/high reward investments. There is potential for high reward, but also potential to lose it all. That's what makes markets. You chose to make a speculative investment. You have to be prepared to lose it all. If you want a more secure investment, look for a lower potential return. You'll sleep better at night.
See Michael Russnow's Profile
Regina1, thanks for your thoughts, but what does any of what you say have to do with what I'm talking about?
Any stock purchase is speculative, and AIG is a major company, not fly by night. I'm not concerned about whether it goes up or down, per se, just that by splitting it in reverse in this fashion will diminish the possibilities for gain. All this while raising eyebrows among institutional investors who will clearly know that the sudden jump in price to, say, $30 after such a reverse split is a sleight of hand designed solely to make the stock appear more valuable. Brokerage funds may stay away from it even more so, viewing this as a deceptive measure, even as the stock has been steadily improving in the past few months with general baby steps of a few cents or so many days and might have happily come on board when the stock naturally evolved back to the five dollar range -- all on its own.
To Dukeitout below, I sure hope you voted it down.
Perhaps I was too subtle. AIG is a major company in trouble and therefore a speculative investment today at any price. That is why the market has priced it as it has. Fewer shares outstanding at a higher price doesn't change the nature of the investment. You aren't arguing that you are going to lose money, just that you are not going to make as much as fast as you had hoped. You took a flyer but don't ilike the uncertainty (including a reverse stock split) that goes with that. There's a saying on Wall Street---bulls make money. bears make money, but pigs get slaughtered. You still have your principle and in fact a gain, so if you dont like where it is going, dont whine, get out.
Michael: Thanks for the article. I just voted yesterday (I won't tell you how.) The impact of a 20 fold reverse stock split really got my attention too. You bring out some good points but so do some of the commentors. I really don't know who's right. Regardless, I hope the value of my investment keeps going up. It's been good so far.
continued...
Using real numbers, investors are currently valuing AIG COMMON STOCK (important distinction) at almost $4 billion. There are 2.7 billion shares outstanding and the stock is trading at $1.46 per share. Given the US Government owns 80% of AIG, leaving common shareholders to own ONLY 20% of the company, that puts a value on the entire company of over $20 billion. But that doesn't tell the whole story - there is over $150 billion of debt on AIG's balance sheet. If you're another company, looking to buy all of AIG, you'll care about the debt (after all, you'll have to pay that off at some point). Thus, the entire company is valued at (in round numbers) $170 billion!!!!
Taking into consideration the bondholders (ESPECIALLY the government) have more secured ownership than the common stockholders, it looks to me like the company is expensive at $1.46 per share. Every time you pay $1.46 per share for this company, you're telling everybody it's worth at least $170 billion. For reference, you can pay just under $25 billion for Travelers, $15 billion for Chubb, $11 billion for Progressive, etc......all companies earning a lot of money and without the government ownership.
See Michael Russnow's Profile
I may be "ignorant" as you put it, but I can read and I look around at the various stocks and how they are priced. The actual value of a company does not affect the specific pricing of a stock, which is based upon what the perceived health and excitement of a company is.
When there's good news about a company or an industry, people buy. When there's bad news, they sell. They're not necessarily glancing at the exact worth of the company. And if you have multiple levels of stock you're obviously going to do better.
With a thousand shares, every jump up a penny equals ten dollars. With fifty shares, well, you get the math. Companies that are selling at higher numbers generally do have daily ups and downs of a greater amount than AIG or Citigroup. However, they are not usually proportional to their larger value as I stated with Wells Fargo and IBM vis-a-vis the smaller stocks.
Actually, the perceived value of the company is what drives stock prices. Institutional investors control the majority of dollars invested in stocks, and their supply and demand is what drives stocks' prices. When earnings are released, or a new product is launched, they update their models, crunch the numbers, make forecasts, and decide what the present value of the enterprise is. Stocks are not just numbers and charts - sometimes momentum investors pile on a stock, and the frenzy feeds on itself (see internet bubble), but even during those times, reasonable investors will (and did) caution that stocks were wildly over-valued. As Ben Graham stated, "In the short run, the market is a voting machine. In the long run, a weighing machine."
And again, don't focus on a penny move - focus on the percentage move in your entire investment. That's the only thing that matters. If a $100 stock goes up by $10 in a day, you can bet that if it were priced at $1.00 per share, it would've gone up by $.10. Both are 10%, and both would've made you $100 on your $1,000 investment.
See Michael Russnow's Profile
So, if you have a thousand shares and suddenly you have fifty, it is hard to conceive that, even with the scenario you depicted -- i.e. a huge rise in value for the company -- that the stock is going to rise that much. With a thousand shares at the lower price, even with small rises like five or ten cents there is steady movement upward and the stock is still affordable. When you are downsized to a paltry fifty shares with a much higher-priced stock, well, you might as well sell your stock, because the movement is going to be unnoticeable, even if the company slowly curves upward.
Many people view a reverse split as a kiss of death, which would be a shame, because the company has begun to correct its mistakes, albeit slowly. I felt that with patience the stock would grow and, while I still believe this to be the case, with fifty shares I will experience no elation. And worse, as stated, those who held the stock when it was way up and have seen their shares plummet, this reverse split possibility is now déjà vu.
Wow, Michael, you are unfortunately terribly ignorant of the basic fundamentals of investing. The fact that a stock reverse splits (or splits for that matter) in no way impacts the potential for future profits for existing investors.
A stock is worth what someone would pay for an entire company. For example, if AIG earns $1billion next year, and investors are currently valuing fincancial stocks at 10 times their earnings, AIG would be worth $10billion (making these numbers up). If there are currently 1 billion shares outstanding it would mean the stock is worth $10.00 per share. If you own 100 shares, your investment would be worth $1,000.
Ok, so if AIG reverse splits (say, 1 share for every 100), you have only 1 share of ownership now. However, 10 million AIG shares will now be outstanding. So, using that value of $10 billion for the entire company, your share of stock is worth $1,000 still ($10b / 10mm).
The future value of AIG stock will be based on their future earnings power. If earnings go up by 10% a year, and the stock is always worth 10x's earnings in investors' eyes, your stock will appreciate 10% a year, regardles of whether you start at $10.00 or $1,000 a share. More importantly, your $1,000 will appreciate 10% a year, regardless whether it's in $10 per share stock, or $1,000 per share stock.
You must be logged in to comment. Log in or connect with
