NEW YORK Rite Aid has been fighting off the delisting of its shares trading on the New York Stock Exchange since September, and although the company had the approval of its investors to execute a reverse-split in its back pocket, certainly that was a card management didn’t want to play if it could avoid it.
Analyst opinion is split on the reverse-split. There are those that believe that the move, by instantly inflating the price per share, can make the stock more attractive to some investors, particularly, institutional investors who tend to shy away from stocks that trade under a certain price. But the result is purely cosmetic and certainly doesn’t change the fundamentals of a company.
“Reverse stock splits are often used by companies that realize that having a low stock price is optically not very attractive,” RBC Capital Markets analyst Gerard Cassidy told The New York Times in March regarding a potential Citigroup stock split. “It does not pretend to say that the company has improved but optically it looks better on investors’ screens or in the newspaper.”
Others believe that the reverse-split sends a negative message to investors, one of desperation. “Investors typically freak out over reverse stock splits,” noted The Motley Fool in a May 6 report on General Motors’ planned reverse split. “There are a few success stories — like priceline.com — but most of the reversers — Sun Microsystems, for instance — are trading lower today.
“On paper, it shouldn't make a difference,” Rick Aristotle Munarriz, a regular Motley Fool contributor, continued. “It's an even exchange. However, just as investors often bid up companies that declare forward stock splits based on optimistic assumptions, it's only natural to coat reverse stock splits with pessimistic assumptions. Until we get a few more Pricelines in the winner's circle, that is unlikely to change.”
The best news for Rite Aid is that for now, it does not have to test Wall Street’s theories on the reverse-stock split. Back in March, NYSE issued a temporary suspension of its minimum share-price listing rule, giving Rite Aid more time to regain compliance. Under the terms of the agreement to suspend NYSE’s minimum listing rule, at this point Rite Aid must maintain an average closing price of $1 for the 30 day-period ending June 30.
So far so good for Rite Aid, since its shares climbed back above $1 in May 11 trading. Its shares closed that day at $1.06, and reached a high for the week of $1.15 the following day. Its shares slipped a bit Wednesday and Thursday, closing at $1.09 and an even $1, respectively, and finished the week at $1.04.