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.
"Although the board reserves the right to change the company's dividend policy in the future, we currently anticipate that the per share dividend paid will be proportionately adjusted," a GE spokeswoman said in a statement.
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.
Write to Theo Francis at firstname.lastname@example.org
(END) Dow Jones Newswires
March 10, 2021 12:06 ET (17:06 GMT)Copyright (c) 2021 Dow Jones & Company, Inc.