There was a day when a reverse split signaled stock had been so battered that the only way to stay off the Pink Sheets was to reverse split massively. But when it comes to big banks that were bailed out by the federal government, a reverse split is much more of a positive indicator.

Under a plan announced Monday, Citigroup (NYSE: C) will exchange 10 shares of its current common stock for one new share in May. After the reverse split, 2.9 billion shares will trade. That will means each share would trade at $44 each.

A reverse split has been long discussed, as many institutional investors are prevented from owning stocks that trade for less than $5 each. Will more institutions now be prompted to buy?

Furthermore, Citigroup is adding another powerful incentive in the form of a dividend. The bank will pay a penny per share as a dividend. That seems like a token amount--and it is--but as a condition of the TARP bailout, the bank is prevented from paying quarterly dividends of more than a penny until 2012. After that, the dividend might go higher if the bank continues to progress.

So, this is a big moment for the bank and CEO Vikram Pandit. The big losers in all of this are high-frequency traders, some of whom made a living trading Citigroup stock. At less than $5 a share they could trade in massive quantities and qualify for rebates from exchanges that in and of themselves were quite lucrative. Who needs a spread when the rebates are that good?

For more:
- here's an Los Angeles Times article

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