A result will be a flood of new Citigroup stock. A reverse stock split would simply provide some financial housecleaning to help the bailout plan go smoothly.
“This is cosmetic,” said Stuart Plesser, an analyst at Standard & Poor’s Equity Research.
But Citigroup is interested in cosmetics at the moment — in anything that brings even the appearance of stability after two multibillion-dollar lifelines, greatly increased government control and a loss in 2008 of $27.7 billion that is among the largest in corporate history.
According to Richard X. Bove of Rochdale Securities, even if nothing else has changed, a $3 or even $5 share price simply looks better than a dollar a share, and will support investor confidence in the long-term sustainability of the company.
Gerard Cassidy, an analyst at RBC Capital Markets, agreed. “Reverse stock splits,” he said, “are often used by companies that realize that having a low stock price is optically not very attractive. It does not pretend to say that the company has improved but optically it looks better on investors’ screens or in the newspaper.”
But a reverse stock split can also have real effects, according to analysts. It can increase demand for a company’s stock by attracting retail investors who feel more comfortable with buying shares with prices in the $10 to $20 range.
Analysts like Mr. Plesser and Mr. Bove said institutional investors are also discouraged by internal rules from buying stocks below a certain price threshold, usually around $5. A reverse stock split may bring these investors into play.
“They are doing it because when a stock sells below $5 a share, it’s not something that many institutions can buy,” Mr. Bove said.
In a memorandum to employees last month, Vikram S. Pandit, Citigroup’s chief executive, said that, after more than a year of losses, the company was on track for its strongest quarter since late 2007, when bad loans and trading losses began to crash down on it.
He said the bank generated a combined $19 billion in revenue in January and February, after strong trading results and wider lending margins.
But once the blush of the reverse stock split wears off, a big question remains: Can Citigroup sustain that better operating performance through the quarter and beyond?
Amid uncertainty about the economy, Citigroup and many other banks will probably have to cope with more waves of losses this year on all kinds of loans as the recession deepens.
Mr. Plesser said Citigroup’s share price could be buoyed if the government announces credible plans for a so-called aggregator bank to buy the toxic assets that still weigh down banks’ books.
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But even if the stock outlook remains uncertain, Citigroup may have started a trend in reverse stock options. Such a maneuver is rare among big banks, but others may be tempted if their share prices weaken and need to be buttressed.
“In the financial space, I have not seen this happening in a while,” Mr. Cassidy said. “But if other bank stocks don’t recover on their own, you may see more.”