By Colin Barr
January 17, 2011

Brace yourself. Citigroup may soon depart the land of misfit stocks.

Citi (C) is due to post fourth-quarter results Tuesday. The No. 3 U.S. bank is expected to make 8 cents a share, reversing a year-ago 33-cent loss and pushing it to its first annual profit since 2007.

But returning to the black may not be the biggest shift ahead for Citi, even after two years of massive losses and controversial taxpayer assistance. Some are expecting the bank to build on Treasury’s stock sale last month and finally trim its massive, bailout-bloated share base.

Doing so wouldn’t change the company’s market value, lately$150 billion or so. But it would make each share more valuable and could send Citi’s stock price, which hasn’t touched $10 since Nov. 14, 2008, out of penny stock territory and back to levels inhabited by hot stocks such as, of all things, AIG (aig).

“With the government now out of its common equity stake, we wonder if [Citi] announces its long awaited reverse stock split in conjunction with 4Q10 earnings,” Barclays Capital analyst Jason Goldberg wrote last week in a note to clients.

Citi has been considering a reverse split – in which, say, 10 existing Citi shares would be converted into one, sending the share price up roughly proportionately – practically since it was bailed out in the fall of 2008.

In the spring of 2009 the bank filed papers asking shareholders to authorize the board to do a reverse split ranging between 1 for 2 and 1 for 30. Shareholders approved the proposal, which gave Citi through June 30, 2010, to put the split in effect.

But Citi’s board didn’t act, and the bank again asked shareholders to give the board the authority this past spring. They did so again, this time with Treasury – which at the time held a quarter of Citi’s shares – voting for the proposal.

Now, with Treasury having sold off the last of its Citi shares last month and the bank showing signs of improvement, the odds are building that Citi will act on the reverse split before the board’s authority runs out in June.

Reverse splits once were seen as an act of desperation, and to some degree they still are. E*Trade (etfc), the online trading company that nearly drove itself into a ditch with bubble-era mortgage lending, did a 1-for-10 reverse split last year,* taking its shares from just over a dollar to a recent $16 and change.

But AIG, which did a 1-for-20 reverse split in mid-2009, has seen its stock quintuple off the lows they reached soon after the split. The stock is up 88% over the past year, recently hitting $60 before a late week pullback, as the company has benefited from the perception it is on its way to repaying the government.

The reverse split question won’t be the only one on deck Tuesday morning when Citi hosts its earnings call, of course. Investors are hoping to see further signs of a banking sector recovey that hopefully will eventually fuel one in the economy.

“We look for C to comment broadly on the direction credit costs will trend in 2011 and to provide anecdotal commentary on the loan demand environment,” writes Goldberg.  But he notes that with 29.7 billion shares outstanding, “it is hard to move the needle” on earnings. That, at least, could soon change.

*Corrected: I originally wrote “earlier this year.” The split took effect in June 2010.

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