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Citigroup Inc. Message Board

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  • glsierra glsierra Sep 18, 2010 12:46 PM Flag

    Why not a buyback and r/s?

    OK. I am not sure why people get so excited about splits and r/s. I mean I understand it from a behavioral finance perspective but there is no intrinsic value creation or distruction which moves the needle on the company's intrinsic value.

    A stock price ...ALL STOCK PRICES ... are completely and utterly arbitrary.

    People think that just because a stock splits that all of a sudden the company is gonna go on a tear price wise.

    The only true "value" that a split does is create a little more liquidity in the stock among retail investors (a fraction of the trading market). Maybe that is worth someting -- may be not. But I know I wouldnt put a huge value premium on that.

    All that said, the practical theory goes: splits help the stock go higher (liquidity, behavioral effects, etc). And reverses actually make the stock price go down. Thats why companies RARELY do r/s. It sends a negative signal to the market. In fact, I think I remember reading about a study how stocks that do r/s tend to not be around 5 years later. (puts a nail inthe proverbial coffin).

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    • One last comment about buybacks.

      Again, no intrinsic value creation for the company. However, it is a more tax efficient way to get excess $$ to investors.

      In other words, the stock price goes up but the market cap essentially stays the same. Therefore, the stockholders basically get their $$ without the tax effect of paying double taxes (corp tax then the dividend tax...).

      In other words, buybacks are better (in my view) than paying dividends because it is more tax efficient for the investor.

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