Citigroup: Contemplating Reverse Split

So what should the company do? Throw it in reverse or no?

On the plus side of the ledger, the split -- most likely a one-for-five or one-for-ten swap -- would make the per share price of the bank more comparable to money-center peers like Bank of America(BAC), JPMorgan Chase(JPM) and Wells Fargo(WFC), arguably providing a psychological lift.

The higher price could also potentially help the company secure more institutional ownership, as many funds can't hold stocks under $5. That in turn might lead to Citigroup shares becoming less liquid, which would not necessarily be a bad thing. Right now, the stock is nearly always the most-active issue on the New York Stock Exchange with daily volumes routinely above 500 million, and the company would probably rather not be a favorite name of the high-frequency firms and day traders behind that kind of churn.

Another positive could be that higher price resulting from a reverse split might make the U.S. Treasury's unloading of its TARP-related stake in the company go smoother, according to Dr. Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette. He thinks a 1-for-10 ratio makes sense.

"A reverse stock split would probably make it easier for the U.S. Treasury to do a large secondary offering to institutional investors who may shy away from stocks under $10," Wilson writes in an e-mail. "Citi is in a good capital position and of late investors have seen its debt safer than Goldman Sachs' (GS)."

The downside? Well, no one disputes reverse splits have a negative connotation.

"Generally the only companies that consider reverse stock splits are companies that have a failed businesses or a failed period in their business," says Scott Colyer, CEO and CIO of Advisors Asset Management in Monument, Colo. "Forward stock splits are generally [used by companies that are] successful with their business plan [and] want to bring that stock price down so more investors will participate."

And while it's purely a cosmetic move, retail investors never like to see the number of shares they own go down. There's also some allure apparently in the low stock price, as it makes investors dream outsized gains will follow when the company gets back on solid ground. For some reason, a $4 stock reaching $20 seems more likely than a $40 stock reaching $200, and that may be why vocal shareholders at the annual meeting were so against the measure.

Colyer, who personally owns shares in Citigroup, says retail investors would rather buy 100 shares of a $5 stock than five shares of a $100 stock. "Mathematically there is no difference, but I don't think retail investors understand," he says.

For Citigroup, the biggest issue may be the message undertaking the reverse split sends. The move could be interpreted as a white flag, an indication that executives don't believe they can get the stock price to go much higher the old-fashioned way, by growing revenue and profits.