Quick-service restaurant chain Chipotle Mexican Grill (CMG -1.60%) has been good to investors, holding up well in this bear market while trouncing the S&P 500 over the long term. The stock's success has steadily pushed the share price to more than $1,500, a price tag many retail investors cannot afford.
Could a stock split take Chipotle's shares to the next level? Here is what investors need to know.
Growing out of reach for the retail crowd
Many consumers love Chipotle's food for its fresh ingredients, vibrant flavors, and affordable price tag. But this lucrative combination has sent the stock soaring over the years.
The stock went public in 2006 and has outperformed the S&P 500 by a wide margin since the financial crisis in 2008-2009. Early investors have enjoyed a 3,000%+ ride over the stock's lifetime, but the success priced new investors out of the fun.
A stock's valuation isn't a matter of share price but how much investors pay for that company's profits, commonly referred to as earnings per share (EPS). However, many retail investors could struggle to buy one or multiple shares at such a price.
First time for everything
That's where a stock split can help. Management can execute a stock split, which divides the company's stock into a higher number of smaller shares. For example, if Chipotle did a 10-for-1 stock split, its $1,500 shares would be divided into ten shares priced at $150 each.
Remember, a split doesn't change the stock's fundamental valuation but lowers the share price, making the stock more digestible for retail investors.
Chipotle's management has not once split the stock in its roughly 16-year history as a public company. They say there's a first time for everything, and hopefully, Chipotle's first stock split will come sooner than later.
Buy Chipotle for this reason, not the stock split
A stock split can make shares more affordable, but you shouldn't buy a stock just for that reason. Instead, buy Chipotle for its reliable growth and high-quality financials.
You can see below that Chipotle has steadily grown -- outside of its infamous E. coli outbreak in 2015, which dinged revenue and hurt the company's net income. Revenue has averaged 12% annual growth over the past decade, while net income has averaged 11% growth despite the outbreak.
Chipotle has a long roadmap to steadily adding new locations over the years and has successfully raised prices to protect operating profit margins despite high inflation. Are you looking for a stock to endure a bear market? Chipotle runs a tight financial ship with $761 million in cash and short-term investments on the balance sheet against zero debt.
Management has shown a willingness to repurchase shares over the years, so even if Chipotle splits, it will go back to work buying shares. That means more profits per share and more investment returns for its shareholders.
Chipotle has created a simple business out of selling meat, beans, and rice, but it's perfected the brand and system to do it better than anyone. Investors should keep an eye out for a potential stock split; it would be an excellent opportunity for investors to accumulate shares while waiting for steady growth to carry the stock higher over the years to come.