Stock splits are fashionable again. Many of the country's most valuable companies have executed stock splits, lowering their per-share prices by simply distributing more shares to existing investors.
And we're not done yet. Chipotle Mexican Grill (CMG 2.41%) could be the next big name to go this route.
There are now just 10 U.S.-listed stocks trading in four figures. Stock splits and market sell-offs have thinned the herd of investments trading north of $1,000. Some of the high-priced stocks have no intention of orchestrating a lower share price, but a good argument could be made for the Baron of Burritos to go the stock-split route. Let's see why the move makes sense for Chipotle.
Cool beans
With the company's stock currently above $1,700, there are just six publicly traded companies with a higher price than Chipotle Mexican Grill. This isn't a race to the top. No one is going to catch up to Warren Buffett, and tech bellwethers have abandoned that particular arms race.
Chipotle doesn't have anything to prove. It has set itself apart from its peers as an aspirational brand with its "food with integrity" mantra and more than 3,000 restaurants in operation. It keeps growing, and even survived 2020, when many chains sputtered. A timely emphasis on digital orders just before the pandemic helped.
Chipotle spruced up its mobile-ordering app and its partnership with third-party delivery specialists. A shift to embracing drive-thru options -- 32 of the 42 eateries it opened in its latest quarter had "Chipotlanes" -- gives folks hungry for a carnitas bowl or barbacoa burrito a new way to get fed.
The concept's popularity continues to blossom. Comps rose 10% in its latest quarter, and that was on top of a 31% surge for the same period a year earlier. A strong cult following has helped it pass along rising food costs in the form of menu hikes, without a consumer outcry.
You get it. Chipotle has advantages in the cutthroat world of restaurant operators. What does this have to do with the company possibly declaring a stock split soon?
A split is a zero-sum game. If Chipotle, at $1,700, declares a 20-for-1 stock split, the value of the company will remain the same. It will just have 20 times the number of shares outstanding at $85. In an era of commission-free trading and many brokers offering fractional shares for purchase, a high stock price shouldn't matter. However, there are still some cases where it does matter.
Options traders don't have the luxury of fractional shares. A lower price helps increase the pool of those potential buyers.
On a broader scale, there's a psychological impact of a stock with a high share price. This isn't a tech giant where stock-based compensation is a major component of the compensation package, but all Chipotle employees have access to buying full or partial shares -- initially at a discount -- after their first year on the job. You don't want to scare them away from buying into their employer with a stiff share price.
It's also easier to get retail investors more excited about a stock in the single or double digits. As a consumer-facing company, Chipotle needs to make its shares as appetizing as its menu offerings.
Are there bragging rights to having a stock price that is more than five times higher than any other restaurant stock? I doubt it. It's time for the chain to do what many of its patrons do with an oversized bowl and split it. Your move, Chipotle.
