Are reverse splits a good thing?

Experts disagree on whether the strategy works for investors. With video updates.

By Kim Peterson Mar 22, 2011 3:32PM
Citigroup (C) investors weren't too thrilled with the bank's announcement Monday of a reverse stock split. The stock fell 7 cents a share and today is down by a penny to $4.43.

The 1-for-10 reverse split cuts the number of shares outstanding to 2.9 billion. Now Citigroup will reinstate its dividend to a whole penny. Big spender! The dividend will cost $29 million every quarter.

The reverse split could be a turnoff to some investors who like to own large amounts of cheap shares, The Wall Street Journal reports. And the stock could become more attractive to shorts who think there is more room to fall.

On the other hand, a higher stock price could attract more investors who aren't allowed to dabble in the cheap territory.

Post continues after this video discussing the bank:

"There is a theory that a reverse split may be a signal by a company's management that the bad news is behind for the company," Morgan Stanley analyst Adam Parker writes in a note. "Thus, there are reasons some investors may think that reverse splits may be positive for stocks."

What ultimately happens to stocks that have gone through reverse splits? Unfortunately, even the experts can't agree.

Parker says that stocks underperform the market in a reverse split, the Journal reports. The percentage is greatest right after the splits and settles at 50% after six months.

But another researcher says reverse splits are good for investors. An equity strategist at Birinyi Associates studied the 14 stocks in the S&P 500 index that have reverse split since 2000. Of those, 12 were higher a year later. The average gain was 62.55%, CNBC reports.

Titanium Metals (TIE), for example, was up 350% a year after its reverse split in 2003. Byt Tyco (TYC), fell by 25% a year after its 2007 reverse split.

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