Stock Split Bolsters Lagging Citigroup Shares

Mar 21, 2011, 11:35 by John Steele

Looking to prevent a slide in stock price that saw Citigroup dip below five dollars a share earlier this week, the beleaguered bank announced a 1-for-10 reverse stock split of the company's common shares, effective to the New York Stock Exchange May 9th.

Most traders avoid stocks that fall below five dollars per share and some firms are barred from trading with companies at this price. In an effort to raise its falling stock price to stable market price, Citigroup will lower the number of shares it has outstanding, thereby raising the price. The quality of the shares, however, will remain unchanged.

Citi CEO Vikram Pandit referred to the stock split as "an important step as we anticipate returning capital to shareholders starting next year."

"Citi is a fundamentally different company than it was three years ago," Pandit told CNN Monday.

While the short-term solution may work to get Citi stock moving again, it blows apart a common trading practice: low-price, high-volume trading.

According to CNBC, Citi stocks can account for 10 percent of the volume of all the trading in NYSE stocks on any given day. That is because it is the ultimate rebate stock. With over 29 billion shares in play before the split, traders could make money on mere cents of increase by trading millions of Citi stocks at once. That trade is dead as Citi reduced the number of shares in play from 29 billion to 2.9 billion.

Citigroup received $45 billion in taxpayer support late in 2008. The government has now recouped all of that, and about $12 billion in profit from stock sales.

Free from government regulation, Citigroup has been working to please the bank's other shareholders. The stock split has not appeared to do much in the short term. After morning trading, shares of Citi were down 2% to $4.43.

Source: CNN