Why GE Is Doing a Reverse Stock Split and What It Means for You
March 10 2021 - 11:17AM
Dow Jones News
By Theo Francis
General Electric Co.'s plan to pursue a reverse stock split
would make it one of the few blue-chip companies in recent years to
use a strategy that has been more common among firms struggling to
stay listed on stock exchanges.
Here are answers to some commonly asked questions:
What is a reverse stock split?
In a reverse stock split, companies trade a fixed number of
existing shares for a smaller number of new shares -- keeping the
value of each investor's holdings the same. The result doesn't
affect the value of the company, just the number of shares
outstanding and the price of each one.
Think of it as exchanging 10 dollar bills for one $10 bill. The
total value of your investment is unchanged, but you have fewer
bills in your pocket.
What is GE proposing?
GE said Wednesday that its board has recommended a 1-for-8
reverse split: For each eight GE shares an investor owns, they
would come out the other end of the process with one GE share.
So an investor with 8,000 shares worth about $14 would end up
with 1,000 shares, each priced at roughly $112, using recent
prices.
GE is seeking shareholder approval for the move at its coming
annual meeting on May 4. Whether the company proceeds with the
reverse split and when it takes effect would be "at the discretion
of GE's board at any time prior to the one-year anniversary" of the
May 4 meeting, the company said.
Why is GE doing this?
GE said its board recommended the move to reduce the number of
shares outstanding to a number "more typical of companies with
comparable market capitalization."
GE has 8.8 billion shares outstanding, and it is one of the most
widely held stocks. It has a market capitalization of roughly $123
billion. By comparison, rival Honeywell International Inc. has
about 700 million shares outstanding and a market value of about
$144 billion.
GE shares have rallied in recent months, climbing above $14 from
below $7 in October. But the stock price remains well below its
historic highs after operational struggles and asset sales left
behind a smaller business. Five years ago, the stock was worth
around $30.
What are the advantages?
The move wouldn't directly change the value of the company or an
investor's position, but it would shrink the number of shares
outstanding to about 1.1 billion.
In theory, a company's share price in and of itself doesn't
matter -- its total value can be divided by any number of
shares.
But some investors avoid shares below certain thresholds, and
some stock exchanges require companies to keep share prices above
certain levels: $1 on the Nasdaq, for example. Some institutional
investors won't invest in companies with stock prices below certain
levels.
Practically speaking, investors often seem to see higher-priced
shares as more attractive -- and companies with prices below
certain thresholds, like $10 or $1, as shakier. In the market, of
course, perception matters.
What are the disadvantages?
A reverse stock split does nothing to address any underlying
problems at the company doing it, including any that have pushed
the stock price down to levels that make a reverse split appealing.
Moreover, a reverse split can suggest that management and the board
see little prospect for a significant recovery in financial results
or the share price, absent the maneuver.
What happens to the dividend?
GE currently pays a quarterly dividend of 1 cent per share. The
company slashed its payout in recent years when it was struggling
with plunging profits and cash flows.
All else being equal, maintaining the same dividend level would
mean 8 cents a share after the proposed reverse split.
A GE spokeswoman declined to say whether the payout would remain
the same after the split, saying the company will provide more
information in its annual proxy filing expected later this
week.
Who else has done this?
Reverse stock splits are most common among companies with low
stock prices struggling to remain listed on stock exchanges, which
often require a minimum share price. Few blue chip companies like
GE have done them, though Citigroup Inc. did a 1-for-10 reverse
split in 2011, after the financial crisis. In 2003, Booking
Holdings, then known as Priceline Group, did a 1-for-6 reverse
split as its shares approached $1, a move that has been credited
with contributing to its subsequent success.
(END) Dow Jones Newswires
March 10, 2021 11:02 ET (16:02 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
GE Aerospace (NYSE:GE)
Historical Stock Chart
From Mar 2024 to Apr 2024
GE Aerospace (NYSE:GE)
Historical Stock Chart
From Apr 2023 to Apr 2024