General Electric Co.
The plan to go for a reverse stock split would make it one of the few blue chip companies in recent years to adopt a strategy that is more common with companies struggling to stay listed on the stock exchanges.
In a reverse stock split, companies trade a fixed number of existing shares for a smaller number of new shares, with the value of each investor’s holdings remaining the same. The result does not affect the value of the company, only the number of shares issued and the price of each individual share.
Imagine exchanging $ 10 bills for a $ 10 bill. The total value of your investment stays the same, but you have fewer bills in your pocket.
What does GE propose?
GE announced Wednesday that its board has recommended an 8-way reverse split: for every eight GE shares an investor owns, they would come out with one GE share at the other end of the process.
So an investor with 8,000 shares valued at about $ 14 would receive 1,000 shares at current prices, each priced at around $ 112.
GE will request shareholder approval for this move at its upcoming annual meeting on May 4th. Whether the company will proceed with the reverse split and when it will take effect is “at the discretion of GE’s board of directors, anytime before the one-year anniversary”. of the meeting on May 4, the company said.
Why is GE doing this?
GE said its board is recommending the move to reduce the number of shares in issue to a number that is “more typical of companies of comparable market capitalization.”
GE has 8.8 billion shares outstanding and is one of the most widely used stocks. It has a market capitalization of around $ 123 billion. For comparison: rival Honeywell International Inc.
has approximately 700 million shares outstanding and a market value of approximately $ 144 billion.
GE shares have rallied over the past few months, rising from under $ 7 to over $ 14 in October. However, the stock price remains well below its all-time highs after operational struggles and asset sales left a smaller company behind. Five years ago the stock was worth around $ 30.
What are the advantages?
The move would not directly change the value of the company or the position of an investor, but it would reduce the number of shares issued to around 1.1 billion.
In theory, a company’s share price doesn’t matter in and of itself – its total value can be divided by any number of shares.
However, some investors avoid stocks below certain thresholds, and some exchanges require companies to keep stock prices above certain levels: for example, $ 1 on the Nasdaq. Some institutional investors do not invest in companies with stock prices below certain levels.
In practice, investors often seem to find higher-priced stocks to be more attractive – and companies with prices below certain thresholds like $ 10 or $ 1 as shakier. In the market, of course, perception is important.
What are the downsides?
A reverse stock split does not fix underlying issues for the company, including those that have brought the stock price down to levels that make a reverse stock split attractive. Additionally, an inverse split may indicate that without the maneuver, management and the board of directors see little prospect of a significant rebound in financial results or stock price.
What will happen to the dividend?
GE currently pays a quarterly dividend of 1 cent per share. The company has cut its payout in recent years as it struggled with declining profits and cash flows.
If all else is the same, maintaining the same dividend level would mean 8 cents per share after the proposed reverse split.
“Although the board of directors reserves the right to change the company’s dividend policy in the future, we currently assume that the dividend paid per share will be adjusted proportionally,” a GE spokeswoman said in a statement.
Who else did that?
Reverse stock splits are most common with companies with low stock prices that are struggling to stay listed on the stock exchanges, which often requires a minimum stock price. Few blue chip companies like GE have done this, despite Citigroup Inc.
carried out a 1 to 10 reverse split in 2011 after the financial crisis. In 2003 it became Booking Holdings,
The group then known as the Priceline Group performed a 1: 6 reverse split when its shares neared $ 1. This step was seen as a contribution to later success.
Write to Theo Francis at firstname.lastname@example.org
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