Burrito-centric restaurant chain Chipotle Mexican Grill (NYSE: CMG) made its public market debut way back in 2006. But in June, it plans to do something it’s never done before: split its stock.
Management is proposing a massive 50-for-1 stock split, meaning investors will receive 49 additional shares for every share they currently own. It’s not quite a done deal yet as the plan needs shareholder approval, but it’s likely to go through.
Stock splits are enjoying their time in the financial headlines. However, there are more important things to watch with Chipotle stock, and there’s only one thing that could be meaningful when it comes to the 50-for-1 split.
What investors need to know
There’s no reason to rush out and buy Chipotle stock ahead of its stock split because stock splits don’t do anything to create shareholder value. As of this writing, Chipotle stock trades near $3,000 per share. After the 50-for-1 split, it will trade closer to $60 per share — no value created or lost.
In the future, Chipotle will create shareholder value as it has in the past — with profitable growth of its business.
Chipotle really has been a marvel since it went public. The company has grown from roughly 500 locations to more than 3,400 today, fueling its revenue growth. But the top line has also benefited from higher sales per location — average unit volumes more than doubled from $1.4 million in 2005 to over $3 million at the end of 2023.
More locations and higher sales per location have led to explosive growth for Chipotle’s bottom line too.
This is how Chipotle has pushed its stock from $22 at IPO to over $2,900 as of this writing, and this is how it will continue to create shareholder value going forward.
To be clear, Chipotle CEO Brian Niccol believes the company’s growth story is far from over. When reporting full-year 2023 results, Niccol said the company can surpass 7,000 locations in North America long term, which is more than double its footprint today. And he believes average unit volumes can eventually climb above $4 million.
Chipotle’s stock split won’t affect its ability to reach these business goals, which is why investors are far better served focusing on the business itself.
There are some reasons to care about the stock split
I just laid out why stock splits don’t matter, but I’ll concede there are other benefits to Chipotle’s 50-for-1 split. First, a stock trading at $60 per share is easier for everyday investors to stomach than one trading at $2,900 per share. Not everyone has access to fractional shares, and the post-split price could bring new investors into Chipotle stock.
On a related note, Chipotle stock options will became much more attainable as well. With options contracts, investors must deal with at least 100 shares. At current levels, options for Chipotle require close to a $300,000 consideration, again pricing out many people.
There are hundreds of stock-option strategies, and many of them are extraordinarily risky. But one of the safer strategies is called a buy-write, and it can be helpful in certain cases. I think Chipotle stock is such a case.
For context, I love Chipotle’s business, but I’m concerned about the valuation of its stock. It’s never been a cheap stock, but as the chart below shows, it’s now trading at its highest price-to-sales valuation ever.
Let’s say an investor wanted to buy 100 shares of Chipotle after the split, but like me, they don’t love the valuation. This investor could buy 100 shares and simultaneously sell a call option. For this, the investor would receive payment and consequently lower (modestly) the all-in cost to buy Chipotle stock.
The downside of this strategy is an investor would have to sell their Chipotle shares if it climbed past the option price within the specified time period. They could potentially miss out on bigger gains while creating a short-term taxable event.
Another potential options strategy is for existing shareholders. Let’s say an investor owns 10 shares of Chipotle that they bought long ago. After the split, they’ll own 500 shares.
Chipotle doesn’t pay a dividend so it’s not an income stock. But investors could take their 500 shares and create income with options by using popular strategies. That could be appealing for long-term shareholders.
So while Chipotle’s stock split doesn’t involve material changes to the business, it could still have positive implications for investors.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Should You Buy Chipotle Stock Ahead of Its 50-for-1 Stock Split? was originally published by The Motley Fool
