10 things you need to know
Although artificial intelligence (AI) and the “Magnificent Seven” stocks are widely credited with driving major stock indexes to record highs, it is safe to say that stock splits are currently the hottest trend in the world. Wall Street.
A stock split is an event that allows a publicly traded company to change its stock price and the number of shares outstanding by the same factor. Since the start of 2024, nine leading companies have announced and/or completed a split.
Stock splits come in two varieties: straight and reverse, with investors decidedly favoring the former. Forward stock splits are designed to make shares more affordable to ordinary investors, while a reverse stock split aims to increase a company’s stock price to ensure it meets minimum standards listing on a major stock exchange, or perhaps it owns a high enough stock. price to attract the attention of institutional investors and mutual funds.
After observing the king of retail Walmart and the AI titan Nvidia end their respective 3-to-1 and 10-to-1 splits, it’s time for the fast-casual restaurant chain Chipotle Mexican Grill (NYSE:CMG) to join this elite stock splitting club. With its stock split looming, here are the 10 things you need to know.
1. Chipotle’s forward division is historic
On March 19, Chipotle’s board of directors announced a 50-for-1 forward split, marking one of the largest nominal stock splits for a company in the history of the New York Stock Exchange . This split, which was approved by the company’s shareholders earlier this month, will increase the number of shares outstanding by a factor of 50 while lowering the stock price to 1/50th of its value.
2. It will come into effect after the closing bell
When I said Chipotle’s stock split was “imminent,” I wasn’t exaggerating. The effective date for its 50-to-1 split is after the close of business today, June 25. Before trading begins on June 26, Chipotle’s stock price will be reduced to 1/50th of its closing price today.
Keep in mind that it is not uncommon for online brokers to take up to 24 hours to recognize that a stock split has occurred. If you’re a Chipotle shareholder, don’t panic if you notice a large (but incorrect) unrealized loss on the morning of June 26.
3. Stock splits are purely cosmetic
Although stock splits are all the rage on Wall Street right now, they are purely cosmetic. Changing a company’s stock price and number of shares outstanding has no impact on its market capitalization or operating performance. Whatever market cap Chipotle Mexican Grill ends with on June 25 will be exactly what it will be worth after the split just before trading begins on June 26.
4. Chipotle employees are the main catalyst for the stock split
What you may not realize is that Chipotle’s first stock split in more than 18 years as a publicly traded company is being undertaken as much for its employees as it is for retail investors. The company wants to encourage its workers to participate in its Employee Stock Purchase Plan (ESPP), which will be much more attractive when the company’s stock trades closer to $64 instead of $3,200 .
Walmart’s 3-to-1 split was also adopted to encourage workers to participate in the company’s ESPP.
5. The company enjoys exceptional pricing power
Since pricing its stock at $22 for its initial public offering (IPO) in January 2006, Chipotle shares have increased more than 14,000%! One of the reasons the company was such a phenomenal investment is that its management team realized early on that consumers would happily pay more for its food if it used responsibly raised meats, prepared its food daily in its restaurants and sourced vegetables locally (when possible). This exceptional pricing power has helped fuel Chipotle’s sustained outperformance.
6. Having a limited menu is the key to success in the restaurant industry
Another catalyst behind Chipotle’s historic 50-to-1 split is the company’s limited menu. Rejecting the idea that “bigger is better,” Chipotle’s management team stuck to a relatively small menu, which helps maximize food preparation efficiency and keep lines moving quickly at its restaurants.
Plus, having a smaller menu helps Chipotle generate a lot of buzz when it introduces a new food.
7. Innovation has been a key growth driver
The company’s innovation has played a key role in its over 14,000% return since pricing its IPO in 2006. Beyond just launching new food products from time to time, the company made waves with the addition of dedicated drive-thru lanes for mobile orders. , which it calls “Chipotlanes,” starting in 2018. Chipotlanes are what helped the business thrive during the COVID-19 pandemic.
8. Split stocks outperform the market as a whole
The reason investors flock to fractional shares is because they historically revolve around the broader market. Between 1980 and today, data from Bank of America A global study shows that the average company that does an early stock split experienced a 25.4% return in the 12 months after announcing its stock split. In comparison, the benchmark S&P500 generated an average return of 11.9% over the same period.
9. Billionaire investors have a mixed view of Chipotle stock
Even though split shares have history on their side and Chipotle has leveraged a number of competitive advantages to boost its earnings per share, Wall Street’s brightest money managers are split on what the future holds for this top-performing fast-casual restaurant. chain.
Based on Form 13F filings that detail first-quarter trading activity, billionaires Ken Griffin of Citadel Advisors, John Overdeck and David Siegel of Two Sigma Investments and Jeff Yass of Susquehanna International were all buyers of the stock Chipotle.
Meanwhile, activist investor Bill Ackman of Pershing Square Capital Management, Steven Cohen of Point72 Asset Management and Israel Englander of Millennium Management all reduced their respective fund positions ahead of the company’s impending stock split.
10. Chipotle stock is exceptionally expensive (and a split doesn’t change that)
Last but not least, Chipotle Mexican Grill’s valuation makes absolutely no sense – and a 50-for-1 stock split won’t change that. While there’s no doubt that the company deserves a valuation premium for continually outperforming other fast-casual chains, Chipotle’s same-store sales growth of 7% during the first quarter falls far short of deserving a multiple of 58 times this year’s forecast earnings, or a forecast price-to-earnings (P/E) ratio of 48.
Once the stock split euphoria surrounding Chipotle wears off, don’t be surprised if its stock undergoes a significant correction.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams holds positions at Bank of America. The Motley Fool holds positions and recommends Bank of America, Chipotle Mexican Grill, Nvidia and Walmart. The Motley Fool has a disclosure policy.
Chipotle Mexican Grill’s 10-for-1 Stock Split Is Imminent: 10 Things You Need to Know was originally published by The Motley Fool
