Chipotle Mexican Grill (CMG 2.41%) stock continues to benefit from an impressive run. So high is its growth that a single share costs more than $2,200, making it the sixth-most expensive stock in terms of nominal price on U.S. exchanges today.
Such levels may lead investors to speculate on if or when Chipotle's board of directors will finally approve a stock split. Chipotle has never split its stock, and some stocks, such as the A shares of Berkshire Hathaway, have avoided such a move despite prices exceeding $500,000 per share.
However, a lower nominal price could increase interest among small investors, thus lifting the stock price. Hence, whether or not Chipotle decides to split its stock, investors should take a closer look at the advantages and disadvantages of such a move.
Chipotle has never split its stock, so why start now?
Ultimately, Chipotle is under no obligation to split its stock. As mentioned before, five other companies have higher share prices than Chipotle.
Moreover, splits do not directly improve a stock's investment case. The value of 10 shares at $1,000 per share is the same as 1,000 shares at $10 per share. Chipotle has also set a goal of operating 7,000 U.S. locations, up from nearly 3,300 U.S. locations today. That growth should continue regardless of the share price.
Also, for smaller investors who cannot afford full shares, the availability of partial shares still makes Chipotle stock accessible to shareholders at all levels. That factor makes it less likely it will split its stock to attract investors with lower budgets.
Furthermore, the high nominal share price has not seemed to preclude the restaurant stock's price growth. Since its initial public offering (IPO) in 2006, Chipotle stock has risen about 100-fold from its original $22 per share. Also, the stock sells for a P/E ratio of just over 50, a level close to five-year lows for the earnings multiple. Thus, high nominal prices may not materially deter growth.
Reasons to consider a split
Nonetheless, one could argue that more shares at a lower price might better serve both Chipotle and its shareholders. Although investors can buy partial shares, such arrangements might involve higher costs and deny investors whatever voting rights go to current shareholders. For this reason, more small investors will probably take an interest if whole shares become affordable.
Moreover, lower share prices help keep liquidity higher. Indeed, shareholders do not struggle to buy or sell shares, but 30-day average share volumes have fallen over time. More than 600,000 Chipotle shares exchanged hands daily five years ago. Today, that number has fallen to approximately 250,000.
Additionally, the growth could prompt the Dow Jones Industrial Average to take an interest in the stock. Unfortunately, indexes like the Dow are price-weighted, meaning higher nominal prices have a disproportionate influence over the index. Hence, any price-weighted index will likely bypass this stock.
Should Chipotle split its stock?
Ultimately, Chipotle will split its stock only when and if the company's board decides to make such a move.
The company has not expressed any public interest in a stock split. Even at a high nominal share price, the stock continues to drive considerable long-term returns and remains on its expansion path.
Nonetheless, smaller shareholders would probably take a greater interest in this investment if they could own whole shares of the stock. Also, a lower price may boost interest in the stock from some indexes. Thus, a stock split could indirectly affect Chipotle, and it is a move the company should probably consider.
