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Citigroup Continues Its Dance With Reverse Splits: The Question Is Why?

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Citigroup just sent me its annual statement and ballot to vote on suggestions from its Board of Directors, which, among other things, extends its flirtation with a reverse split that began two years ago.

For those unaware, a reverse split is the opposite of a split, which is when stock prices get too high and the price might be split in half with each stockholder getting a doubling of shares. When this happens it's a sign the company is doing well, but because the share price might be too high for a lot of action, halving the price makes it more affordable and shareholders get a chance at continued upward movement with more stock.

With a reverse split, a company is in trouble and stockholders lose their shares proportionately to effect a rise in the cost of the stock. So, if you had 1,000 shares of AIG when it split 1:20 in 2009, you wound up with fifty shares, but the price went from $1.15 to $23.

Here's the rub. Everyone knows the new price is artificial and they're not fooling anyone. It's a sign of desperation, which in AIG's case was calculated to prevent the stock from tumbling below a dollar and getting delisted from the New York Stock Exchange. Citi itself was in that ballpark two years ago for a short period. However, the stock moved up remarkably since then and hasn't sold below three dollars in quite awhile. It's been over four dollars mostly and occasionally has gone over five. So, since it's in no danger of delisting, why even talk about giving the company a bad mark?

The Directors' statement insists they merely want to "extend their right" to do a reverse split in seven possible combinations: 1:2, 1:5, 1:10, 1:15,1:20, 1:25 and 1:30, but may well not as they haven't since they received shareholder authorization to do so in 2009. They explain the upside is that by decreasing the number of shares it would reduce fees on the NYSE. They also warn that in the unlikely development the reverse split vote fails they will still have the right to do so for two months under the approval attained in last year's shareholder vote. And of course they remind us the inflated share prices might not stay anywhere near the new level, and that's what worries me.

When AIG did its split, it was $23 for a day or so, and went down to $18 and in short order sold at $9, or the equivalent of 45 cents before the reverse split happened. This was due to short trading, when people bet against a stock's value and borrow "x" number of shares that they sell at the higher price, hoping it falls markedly so they can buy it low and return the shares they borrowed at a profit. That's what happened with AIG, and what makes the geniuses at Citi think it won't happen with their stock?

Another reason Citi says reverse splitting might be good is because many institutions forbid purchasing stock below $5, and a higher price would stimulate buying and presumably cause the stock price to move upward. Except Citi is already a favorite of hedge funds and usually trades in large volumes. But even more significant is that Citi's relative stagnant movement has been matched by most of the other financial institutions, which sell at prices significantly higher than $5.

Bank of America, which hovers between $10 and $18, goes up and down at the same level as Citi. So does Wells Fargo, trading between the high twenties and low thirties. Also, Goldman Sachs, back and forth between $140 and $180. Mostly, when they go up Citi goes up and when they go down Citi drops, so why would the Board believe its price fluctuation percentages would be better if it sold at a higher price?

More likely there'd be an immediate stigma against Citi, with a drastically lower price effected after a reverse split as AIG suffered. And even if it eventually came back, as AIG did after a year or so, rising to $62 a few months ago, you have to realize that in pre-reverse split figures (1:20) it really only "recovered" to a price of a little more than $3 after having tumbled to 38 cents from a pre-reverse split high of $70 a few years ago.

And where is AIG today? It sold for $37.35 on Friday ($1.87 in pre-reverse split numbers), partially due to issuing warrants in early January that lowered its price over $8 in one day to cover the company's granting shareholders .53 of a warrant per number of shares owned. Each warrant had an opening value of approximately fifteen dollars and permitted holders to buy a share for $45 over a ten year period. Just before warrants were issued AIG was $54, but it quickly fell below $45. For the moment the warrants aren't such a great deal vis-à-vis the share price plummeting to the mid-thirty range, and while the quote may eventually go up I'm glad I got out at $52.75, a profit of 126%.

So, I don't know why Citi, with no danger of delisting and with its price ups and downs approximating the percentages of other major banks which sell well above five dollars, wants to mess with its public image and risk luring the short-players to wreak havoc on the stock's price? Why not be patient and do a good job and instill confidence in the company, moving past five dollars and upward the old fashioned way by just earning it? That's what I'd suggest, and I don't pretend I'm any sort of expert, but I can read and I see what the other financial stocks are doing, and what "success" AIG had with its reverse-split. Leave it alone, Citi, please.

Michael Russnow's website is ramproductionsinternational.com