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Reverse stock splits are rarely good news for investors. It generally means the company is struggling and wants to artificially inflate its share price for various reasons, such as remaining on a major stock exchange or appealing to institutional investors.
But what does the General Electric reverse stock split mean for you? This article discusses why companies conduct stock splits and how a reverse stock split affected GE’s share price after its reverse stock split in 2021.
What is a stock split?
Before you learn about reverse stock splits, it’s important to understand what a traditional (or “forward”) stock split is and why companies choose to do them.
Companies choose to do stock splits to lower their share price and appeal to new investors. Lowering the stock price boosts liquidity and makes the stock more affordable for new investors without compromising its value.
Stock splits tend to positively affect the company’s stock even though the split itself doesn’t move the share price. It’s generally a sign that the company is doing well and wants to sell more shares to investors.
It’s important to understand that, in a forward stock split, the total market value of the company’s outstanding stock remains the same but the stock price decreases since there are more shares to go around.
Split ratios are used to split the stock into additional units. For example, the most common ratios are 3-for-1 or 2-for-1 stock splits, meaning your current stock multiplies by three or two after the stock split, respectively.
Stock split considerations
While stock splits may be a good sign for investors, there are some considerations that companies make before issuing a stock split. First, stock splits are often expensive and require legal counsel to satisfy all regulations and requirements.
Since stock splits don’t create any real value, the expensive legal process may not be worth it for some companies considering a stock split. Additionally, some investors believe that stock splits may attract the wrong investors by lowering the share price.
Lowering the share price could have consequences for companies listed on exchanges like the Nasdaq. This exchange requires companies to trade at or above $1 to maintain their listing status. Companies that trade below $1 for 30 consecutive days may be delisted from the Nasdaq.
Reverse stock splits
Reverse stock splits are the opposite of forward stock splits. They usually mean that a company is struggling and needs to inflate its share price to stay on a major exchange or continue appealing to institutional investors.
Just like with a forward stock split, the total market value of all shares remains the same, but the individual share price increases with reverse stock splits. Companies do reverse stock splits with opposite ratios than forward stock splits. In General Electric’s case, they issued a 1-to-8 reverse stock split that reduced their total outstanding shares and inflated their share price.
As you’ll see with GE, reverse stock splits often don’t work out well for the company. They are sometimes seen as a last resort for the company to stay on a major exchange by increasing the trading price of the stock.
Can you profit from a reverse stock split?
Since the stock’s share price increases, you may wonder whether you can profit from a reverse stock split. The only way investors can profit from reverse stock splits is to buy shares before the split, which is nearly impossible. Otherwise, you’d need to short the stock after the split and hope the share price falls.
General Electric reverse stock split
In late July 2021, General Electric announced that they completed the reverse stock split that had been in the works for several months. They chose a 1-to-8 reverse split that reduced their outstanding shares from 8.8 billion to 1.1 billion and increased each share by an eight times multiple.
Reverse stock splits are rare among public companies, which may make you wonder why the General Electric reverse stock split took place. GE cited concerns over several divestments made by the company from GE Oil and Gas and NBCUniversal.
At the same time, the company settled a fraud lawsuit for $200 million, making investors feel uneasy. One of the ways they thought they could remedy the situation was by increasing the stock price and reducing the overall number of shares available to investors.
The result of GE’s reverse stock split
In the immediate days following the reverse stock split, General Electric’s share price increased as expected. As you’ll see on the chart below, the stock price rose to about $115 per share following the announcement. However, over the next year, the stock decreased to levels close to where it traded before the reverse stock split.
General Electric released a statement saying that it intended to increase the trading price of the stock to reflect what they believe the stock should be trading at. They pointed towards the fact that the stock price should reflect the future of GE and not the past.
Other examples of stock splits
While reverse stock splits aren’t as common today, forward stock splits happen more often to companies that are doing well and want to increase their liquidity. One example of a stock split is Apple in 2020.
Apple issued a 4-to-1 stock split that divided the share value by 4. At the time, Apple was trading for roughly $540 per share and went down to $135 immediately following the split. The outstanding shares increased from about 3.4 billion to 13.6 billion while the market cap remained the same.
This isn’t the first time that Apple issued a stock split. They chose to do stock splits in 1987, 2000, 2005, and 2014. In Apple’s case, issuing a stock split was a clear indicator that the company was growing and showing strong signs for investors in the future.
Investing in GE
While General Electric saw its stock price decrease in the months following its reverse stock split in 2021, now may be a good time to consider buying the stock. As of November 1, 2022, the stock is up 22 percent over the past month and continues to trade higher intra-day.
One of the best ways to invest in GE on a tax-advantaged basis is by opening an individual retirement account (IRA). IRAs help you save for retirement and give investors the ability to defer taxes and experience tax-free growth on your contributions.
Those that want to take advantage of GE’s trending stock price should look into choosing GE as an individual stock in their IRA contribution list or add them to your 401(k) or Roth IRA allocations.
General Electric reverse stock split FAQs
Do you still have questions about the General Electric reverse stock split? Below are the answers to the most common questions about the split.
Why did General Electric do a reverse stock split?
GE explained to shareholders that divesting significant businesses like NBCUniversal didn’t reduce their share count proportionately. The reverse stock split was a way to reduce the number of outstanding shares to position GE’s stock in line with where the company thinks it should be based on its size.
Are dividend payments affected?
General Electric proportionately adjusted the per-share dividend to reflect the changes of the reverse stock split. The company announced a quarterly dividend of $0.08 per share which they noted can change at any point in the future.
What happens to my shares as a GE shareholder?
GE shareholders will find that every eight shares of GE stock were divided into one share, and the stock price increased eightfold. Fractional share owners are entitled to receive cash compensation for their outstanding shares.
Mark Turner is an author and editor at Sophisticated Investor. He has over two decades of experience in the financial industry as a broker in both Chicago and New York and has written for several top tier publications. He currently covers the topics of alternative investments, geopolitical events, US economy, portfolio diversification and others.
