A day after announcing that New York Community Bancorp (NYSE:NYCB) had closed a $1 billion funding round to keep the bank afloat, shares of NYCB stock are on the move higher today. Some of this move appears to be tied to this recent announcement. However, there’s another move the bank is making today that’s also generating interest around the stock.
The embattled bank has announced plans to put forward a 1-for-3 reverse stock split to a shareholder vote. This move is expected to make the company’s stock price more attractive to a more diverse investor base but will require 20% shareholder approval to pass.
The rationale behind a reverse stock split is to raise a company’s share price by eliminating outstanding shares. By increasing the price of the company’s stock, the hope is that certain investors with investing mandates will still be able to purchase and hold shares for their funds. Thus avoiding arbitrary selling pressure, which can come when a given stock falls below a specified dollar amount.
Let’s dive more into what this announcement means for investors and why NYCB stock is showing signs of life today.
NYCB Stock Moves Higher on Reverse Split Announcement
To be clear, a reverse stock split does nothing to affect the underlying valuation of a given company. It’s simply a mathematical exercise that leads to a rise in a stock’s value, which can have some knock-on effects. Those knock-on effects tend to be positive (such as maintaining listing requirements and wooing institutional investors), leading embattled companies with beaten-down share prices to often carry these out.
New York Community Bancorp’s recent surprise loss tied to underperforming loans has many investors concerned. The regional lender slashed its dividend and sought financing to shore up its balance sheet. However, with more debt comes less visibility of earnings, something certain investors may not like to see.
So, the picture is still murky for New York Community Bancorp moving forward. The bank’s acquisition of pieces of other failing regional banks has pushed its loan book to new levels. At these higher levels, regulators begin to scrutinize banks more heavily.
Accordingly, we’ll have to see how this regional bank performs in the coming quarters before making any conclusions about its long-term prospects. But at least for now, NYCB is a stock many investors appear to be taking the view that the risk is worth it.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
