Stock splits are often misunderstood. They don’t change the fundamental value of a company; instead, they increase the number of shares available, making them more accessible to a wider range of investors.
It is similar to peeling and cutting an orange. The orange remains the same, but the smaller pieces are more convenient to consume.
This technical adjustment – essentially a pure exercise in accounting gymnastics – can create excitement in the market because it often signals a company’s strong performance and growth potential. For those looking to capitalize on the stock split buzz, here are two outstanding investments that are currently on the verge of stock splits.
Key details about Chipotle’s upcoming stock split
Let’s start with the most obvious stock splitter. Chipotle Mexican Grill (NYSE: CMG) proposed a 50-1 stock split on March 19, and shareholders will vote on the proposal at Thursday’s annual meeting. The measure is likely to pass with an overwhelming majority.
First, I can’t recall any example of straight stock splits receiving a negative in terms of shareholder approval. Second, this would be the first stock split in Chipotle history, and the stock price is going to be quite high. Currently trading at $3,090 per share, there are only four firmer stocks in the US market at the moment.
Again, the split won’t add any value to Chipotle’s market cap, but it will make the stock easier to manage — especially for retail investors with a modest stock-buying budget. Some of us would have to save for many months before we could get our hands on a single share of Chipotle today, and some of the most popular stock brokers haven’t yet embraced fractional trading. But after the proposed 50-for-1 split, the stock price should fall to around $62 on the morning of June 26.
Chipotle stands out in the restaurant industry for many reasons. In an era of widespread franchising, Chipotle insists on owning its own stores to control product quality and employee relations. The career-oriented management style reminds me of Costco‘S (NASDAQ: COST)complete with generous employment conditions and solid pay scales.
The upcoming stock split suggests that Chipotle’s leadership expects its stock prices to continue rising for the foreseeable future. The company’s focus on product quality and human relationships with employees sets new standards for the restaurant industry.
Personally, I can’t eat at Chipotle – cilantro tastes like soap – but it’s undeniably a great company, and the stock split makes it more accessible.
Why Costco Should Consider a Stock Split Soon
Speaking of Costco, the wholesaler should consider a stock split these days.
Costco is not a complete stranger to stock split operations; it’s only been a while. The last stock split was a 2-for-1 affair on January 13, 2000. Costco’s stock has since achieved a total return of 2,450%, giving it S&P500 (SNPINDEX: ^GSPC) index far behind with only 477% gain:
Like Chipotle, Costco is known for its employee-friendly environment. The Kirkland selection of private label products is often indistinguishable from the leading brand options. In fact, they are often made in the same factories, by the same leading manufacturers, but packaged with a Kirkland label and sold at a lower price.
And Costco manages its retail operations close to the breakeven line. The company is quite profitable anyway thanks to its membership store system. Annual fees accounted for 1.9% of Costco’s total sales in last month’s third-quarter report, but also generated more than half of the company’s operating profit.
Costco has not yet announced a stock split or arranged a shareholder vote on the idea. But with stock prices crossing the $800 mark last week, these stubs are becoming a bit unwieldy. It would behoove Costco’s board of directors to make the stock more easily accessible to individual investors — including their own employees.
Should You Invest $1,000 in Chipotle Mexican Grill Now?
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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill and Costco Wholesale. The Motley Fool has a disclosure policy.
Stock-Split Watch: 2 Big Name Stocks That Look Ready to Split Originally published by The Motley Fool
