Chipotle Mexican Grill (CMG 3.81%) has been one of the biggest surprises of the pandemic era for investors. Its share price has more than tripled from the low point it hit last March as sales have surged thanks to the success of the company's digital channel, which is now driving about half of its sales.
The stock reached a high of $1,579.52 last month -- only five companies in the S&P 500 have higher share prices. That's also more than triple the share price of the next-highest restaurant chain, Domino's.
Chipotle IPO'ed in 2006 at $22 a share and has never split its stock. On Thursday, it closed at $1,322.70 -- up by about 65 times, making the stock one of the best performers of its era.
However, with the chain continuing to grow rapidly, it's worth asking if the company should finally do a stock split.
Image source: Chipotle.
Anatomy of a stock split
Splitting a stock doesn't create any value. It simply makes individual shares cheaper to buy. If you have one share of Company X worth $100, and it does a 2-for-1 split, you would then own two shares worth $50 each. The value of your investment in Company X would remain $100.
However, a stock split can influence share price and valuation in a number of ways. First, the action signals management's confidence in the company's growth outlook. It can be viewed as an indication that they believe that the business is in position to expand in a way that will push the stock back up to its pre-split levels.
Tesla and Apple both surged last year when they announced stock splits, in part for this reason.
However, there's a better reason for Chipotle to split its stock than pleasing investors. It could be part of a smart strategy for rewarding the chain's front-line employees.
A tight job market
Restaurants are hustling to add staff as the economy reopens and Americans return to their pre-pandemic routines like dining out. The labor market has become highly competitive, and in this environment, low-paying businesses are finding it hard to hire.
To make itself a more attractive employer, Chipotle just announced it would be raising its wages, boosting its starting pay for hourly crew members to a range of $11 to $18 an hour. The company says that its average hourly wage will be $15 an hour by June, up from $13 an hour previously. It also said that the company offers a path to six-figure annual compensation for crew members in as little as three-and-a-half years if they work their way up to becoming a "restaurateur," the title the company assigns its highest level of general manager. It's even offering an employee referral bonus.
At the same time, Chipotle also finds itself embroiled in a lawsuit in New York City, where it's being charged with not giving workers regular schedules as a 2017 law requires. New York Mayor Bill De Blasio even said he's boycotting the burrito chain. Chipotle has also been criticized for the magnitude of the gulf between its CEO's compensation and what it pays its front-line workers. The chain has been a focus of protests by labor rights activists.
While raising wages and offering promising career paths should help with recruiting, the company is thus far ignoring what could be an excellent tool both for attracting new employees and defending itself from its critics: its stock.
Considering how much the stock has climbed since the company went public -- and the fact that it has tripled since last March -- Chipotle's cooks and cashiers would have enjoyed substantial rewards if some of their compensation had come in the form of its shares. Like many companies, Chipotle allows its employees to buy full or fractional shares at a discounted price after they've worked there for a year, but the high price tag of the stock may dissuade some of them from doing so, even if fractional shares are available. Novice investors, for example, often associate low share prices with bargain stocks, and high share prices with overvalued ones.
Take it one step further
Chipotle should pair a stock split announcement with a plan to grant employees restricted stock units, much in the way Starbucks does with its Bean Stock.
Doing so would help the burrito maker stand out further among restaurant chains in recruiting employees, and it would give it a competitive advantage as, unlike most fast-food chains, it doesn't franchise its restaurants. Franchisees can't give away company stock, but Chipotle can, and that's could be a huge potential incentive -- especially for a company focused on building a career track that turns successful crew members into restaurateurs. It would also earn Chipotle plaudits from investors, employees, and labor activists alike.
Other companies, like Kroger, have enacted stock splits in the past to make their shares more accessible to employees, so Chipotle would be following a well-worn path here. And the move could also make its stock more appealing to retail investors.
In short, it could be a win-win-win for the company and shine a spotlight on how successful it has been over its history.
