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Is Citigroup’s Reverse Stock Split a Smart Move?

Last week I wrote a story about a pending boom of reverse stock splits. In that piece, Anton Schutz, manager of the Burnham Financial Services Fund (BURKX), predicted that Citigroup (C) would engineer a reverse stock split in the coming months.

It looks like Schutz’s prediction will come to fruition: In a filing with the SEC on Thursday, Citigroup says it is considering a reverse stock split as part of its effort to convert preferred shares to common shares.

Citigroup’s shares jumped more than 10% in early trading, but now the stock is down more than 6% to 2.89 in midday trading.

Why does a reverse stock split makes sense for Citi? “Whether the stock is $1 or $3, it’s still a low-priced stock,” Schutz says. “If you are the leading financial services company in the world, the psychology of a low-priced stock isn’t going to fly.”

Ideally, Citigroup will aim for a reverse stock split that gets the current price to the $30 range, Schutz says. (Based on today’s price, it would roughly mean a reverse split of 10 shares for one share.)

Yet research shows a reverse split is a signal to dump a stock. A 2008 study of 1,600 companies that did reverse splits found the typical stock underperformed the broad market by 50% on a risk-adjusted basis during the three-year period after the action. “Reverse stock splits are a strong indicator the company is going to be a significant underperformer during the near future,” says Jim Rosenfeld, co-author of the study and an associate professor of finance at Emory University’s Goizueta Business School in Atlanta.

What do you think? Would a $30 stock price make you feel better about Citi’s prospects?

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