HomeBusinessChipotle announces 50-1 stock split. Here's what investors need to know.

Chipotle announces 50-1 stock split. Here’s what investors need to know.

That cannot be denied Chipotle (NYSE: CMG) is one of the most recognized companies in the world. Last year, the burrito supplier even made the Time 100 list of most influential companies for “helping farmers transition to organic produce, using renewable energy, composting and linking bonuses directly to ESG goals.” The company was also cited for its savvy approach to social media.

Its continued execution and impressive business performance have contributed to a rising share price. Over the past year, Chipotle stock is up a whopping 74%, but that’s just the beginning. For those lucky enough to participate in the IPO in early 2006, the stock has risen from $22 to about $2,798, a staggering 12,616% gain.

In a press release issued after the stock market closed on Tuesday, Chipotle announced plans to split its stock for the first time in the company’s 30-year history. This stunning revelation is generating a new wave of interest in the restauranteur and its shares. It also raises questions for shareholders about how a stock split works and what it means for investors.

A partially eaten Chipotle burrito with a side of guacamole and tortilla chips.

Image source: Chipotle.

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The details of the stock split

Management announced that the board of directors had approved a 50-1 stock split, “one of the largest stock splits in the history of the New York Stock Exchange.” The stock split will be subject to shareholder approval at Chipotle’s annual meeting on June 6. Assuming Chipotle investors approve the measure, shareholders of record will receive an additional 49 shares for each share they own after the close starting June 18, 2024. The trading will take place on June 25. The shares will trade on a split-adjusted basis when the market opens on June 26. The schedule may vary slightly from broker to broker, and it may take a few days for the newly minted shares to materialize.

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Let’s provide some context to simplify the process. For every share of Chipotle stock an investor owns — currently trading for about $2,800 per share (at the time of writing) — shareholders will own 50 shares worth $56 each after the split.

Is a stock split a good thing?

As the example above illustrates, the total value of the shares does not change. One share of Chipotle priced at $2,800 is worth the same amount as 50 shares worth $56 (50 x $56 = $2,800). The pizza analogy is useful in this case. When you buy a pizza, it doesn’t matter whether you cut it into 8 or 16 slices, you still have the same amount of pizza. Likewise, Chipotle shareholders will simply have a larger number of cheaper shares.

Another school of thought suggests that investor psychology plays a role. There is often a lot of excitement in the weeks and months leading up to a stock split, with investors temporarily driving up the stock price to ‘get in’ on the stock split. Some believe the lower price causes a commensurate increase in demand for the stock as the stock becomes more attractive to individual investors, but that phenomenon has historically been short-lived. Over the longer term, the company’s operating performance and financial results will drive the stock higher or lower.

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Are Chipotle Stocks a Buy Now?

While the stock split itself doesn’t suggest Chipotle is a buy, there are plenty of other reasons to invest in fast-casual restaurant stock and the company’s recent financial report is packed with evidence.

In 2023, Chipotle generated revenue of $9.9 billion, up 14%, resulting in diluted earnings per share (EPS) of $44.34, up 38%. The fact that earnings per share exceed sales growth is a sign of scale and leverage, with more profits flowing to the bottom line. Additionally, Chipotle’s comparable restaurant (or composer) sales rose 7.9%, while the number of transactions rose 5% and the average check rose 2.9%. That growth is particularly impressive considering Chipotle’s market cap of about $77 billion.

There are even more reasons to be optimistic. The company’s Chipotlane strategy was a great success. Drive-thru lanes dedicated to picking up mobile prepaid orders have been proven to generate greater revenue and increase profit margins. Chipotle ended 2023 with 811 Chipotlanes, and the company could add another 200 in 2024.

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Chipotle’s aforementioned digital strategy is also driving growth. The company’s rewards program surpassed 36 million members in 2023, an increase of 14%. As a result, digital orders have grown faster than restaurant sales, which will represent 37% of total food and beverage sales by 2024.

This suggests that while investors shouldn’t buy Chipotle stock based solely on the upcoming stock split, the company’s long track record of strong execution, blistering price gains, and robust performance makes it a winning investment.

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Danny Vena holds positions in Chipotle Mexican Grill. The Motley Fool holds positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

Chipotle announces 50-1 stock split. Here’s what investors need to know. was originally published by The Motley Fool

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