Earth to Dick Bove: A Citigroup Stock Split Lesson

Dick Bove argues that Citigroup’s (NYSE:C) planned reverse stock split is a bad idea because, in part, individual investors are “better” shareholders than institutional investors.  To wit, he writes:

Second, a reverse stock split of this magnitude reduces the number of potential buyers.  It knocks many retail buyers out.  Retail buyers are generally considered to be better owners of stock because they attend [sic] to hold for longer periods than institutions.

None of this makes much sense.  A reverse stock split does not reduce the number of potential buyers.  All that a reverse stock split does is reduce the number of shares.  In this case, it reduces the number of shares by 90%: Citigroup (NYSE:C) presently has approximately 29 billion shares outstanding, and, after a 1-for-10 reverse stock split, it will have approximately 2.9 billion shares outstanding.  Mathematically, this is: 29,000,000,000 * (1/10) = 29,000,000,000 * 0.1 = 2,900,000,000.  But you can’t conclude on the basis of a 90% reduction in the number of outstanding shares that the number of “potential” retail buyers has declined as well.  One does not affect the other.

Additionally, it is not clear either that (1) retail buyers hold stock for longer periods than do institutions or (2) that longer-term shareholders are better for companies than shorter-term holders.  One could easily argue that short-term shareholders are not complacent and so agitate for managerial change when the company has underperformed.

It should be noted that Bove’s other arguments about the reverse stock split are good ones.  But his absurd interpretation of the relationship between potential individual investors and the number of shares outstanding calls into question his understanding of the nature of stock splits, and so should give anyone considering his advice pause.  Nor does his connection between one’s holding period and the good that holding period does the company make much sense.

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