Will This Reverse Stock Split Be a Rare Winner?

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Reverse stock splits aren’t generally seen as a good sign. When a stock has to resort to cutting its number of shares outstanding to boost its price, it’s often an indicator that the company doesn’t think its business can support the kind of growth necessary to get its stock moving in the right direction without such moves.

Last Friday, General Electric (NYSE:GE) confirmed that it will become the latest company to roll the dice on a reverse split. We’ll examine some details on the reverse stock split  and what it means for investors, but first, let’s take a quick look at how the broader market did to begin the week.

A good start on Wall Street

Monday brought bullish investors back to the investing world after tough conditions last week sent stocks reeling. By the time the closing bell rang, the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC) were up significantly.

Index

Percentage Change

Point Change

Dow

+1.76%

+587

S&P 500

+1.40%

+58

Nasdaq Composite

+0.79%

+111

Data source: Yahoo! Finance.

Doing the splits

General Electric’s announcement confirmed that the industrial conglomerate will move forward with its 1-for-8 reverse split as approved at its May annual shareholder meeting. GE’s plan is to make the reverse stock split effective after trading ends on Friday, July 30. Investors will get their first chance to trade the split-adjusted shares the following Monday, August 2.

CFO Carolina Dybeck Happe tried to explain the reason for the reverse split. She noted that although GE has divested several of its major business units in recent years, in particular the GE Capital financial unit, it hasn’t made any corresponding adjustments to its outstanding share count. The result is a share base that inappropriately reflects the enterprise’s former size rather than its more compact current configuration. After the split, GE will have just 1.1 billion shares outstanding, with a stock price that should come in just over $100 per share based on where shares closed on Monday.

Can GE grow again?

In the past, many companies that have done reverse stock splits have seen their share prices continue to fall. Often, the move only provides extra fodder for bearish investors looking to make money by selling a stock short.

However, there’ve been some notable success stories. Perhaps the biggest involves Booking Holdings (NASDAQ:BKNG), which notably did a 1-for-6 reverse split in the early 2000s following the tech bust. The online travel giant’s stock has been a huge multibagger since then as the business regained traction in the mid-2000s and afterward.

In order to beat the odds, General Electric will have to execute well on its growth strategy. That requires seeing the key aviation segment regain its past prowess, while also taking advantage of rising demand in power and renewable energy to bolster its overall presence in that key market. GE also has high aspirations for its healthcare business, as it hopes that an innovative spirit will get rewarded in the long run.

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GE has been a huge disappointment for shareholders since the mid-2010s, and despite a sizable bounce, the stock remains far below its best levels historically. That gives General Electric some room to rebound if it can get its business back on track. However, patient investors have to hope that the reverse stock split will prove to be a positive catalyst to affirm confidence in the future of the business in order to justify taking more time waiting for GE to turn itself around completely.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.



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