What happened
Shares of the mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 1.69%) dropped as much as 10% on Sept. 26. The big news here hails all the way back to Sept. 8, when the company announced a reverse stock split. The market's reaction is not at all surprising.
So what
For the most part, a reverse stock split is no more meaningful than a normal stock split. In both instances the number of shares a stockholder owns changes, but the actual percentage ownership of the company stays the same. In a reverse split, you just end up with fewer shares.
In this case, the reverse split was 1-for-4. Companies often do reverse splits because they need their share price to be higher than what it is to remain exchange traded, which wasn't the case here. However, there was another roughly similar reason here.
According to the Sept. 8 press release, "...the Company believes the reverse stock split will make the common stock more attractive to a broader range of investors..." Reading between the lines, there are certain institutional investors, like pension funds, that have minimum price guidelines that prohibit them from owning stocks that trade below certain dollar levels. Often that level is set at $10, which is higher than Annaly's presplit price. Thus, the reverse split allows such investors to own the stock.
Now what
That isn't a negative per se, but reverse splits are often viewed negatively by investors, given that stocks tend to fall to low levels for specific reasons. In this case, Annaly's dividend has been falling for years. And now, it is also faced with a difficult rising interest rate environment that is upending the housing market. So it is not at all shocking that investors took a glass-half-empty view of the reverse stock split now that it has occurred.
