Chipotle's planned 50-to-1 split unites bull and burrito lovers

(Bloomberg) — Chipotle Mexican Grill Inc.'s landmark proposal highlights… The stock split highlights the enormity of this year's uptrend by showing how far the fast food chain has to go to make its stock more accessible to those who enjoy an affordable burrito.

Most read from Bloomberg

The 50-to-1 split announced Tuesday would be one of the largest ever on the New York Stock Exchange if approved by shareholders at Chipotle's annual meeting on June 6, the California-based company said. If agreed upon, the stock will begin trading on a post-split basis on June 26.

Although the move won't change anything at the company except the stock price, it still generates excitement: Chipotle shares have soared to new highs, building on a record run that has sent the stock up more than 26% this year.

“A 50-for-1 Chipotle stock split is unheard of,” said Howard Silverblatt, a Wall Street veteran with nearly a half-century of experience as a senior index analyst at S&P Dow Jones Indices. “I've never seen anything this big. This is abnormal.”

A stock split simply takes a share and divides it into multiple tranches without changing the overall value or ownership group. Companies seek splits—or reverse splits, which do the opposite—largely for reasons of perception. When a stock price is too high, it can turn off individual investors. When it's too low, it can make a company look cheap in a garish way.

Silverblatt explained that splits are no longer preferred as purchasing fractional shares has become more popular recently. Last year, only four companies in the S&P 500 index did stock splits. But as stock markets rise in 2024, there's a bigger visual problem for companies with eye-popping stock prices. While only two companies have officially split their stock this year, the companies realize it could create more demand for retail customers because the stock is worth less in dollars.

See also  UBS in Discussions to Buy Credit Suisse: Report

“The big question now is: Will stock splits come back?” Silverblatt said.

shock

Chipotle's rationale for the split is to make its stock “more accessible” to employees and a broader range of investors. At nearly $2,900, a single serving of Chipotle is more expensive than the average American homeowner's monthly mortgage payment. A 50-for-1 split would reduce Chipotle shares to roughly $60 as of Friday's closing price, much like an outside call.

The two Standard & Poor's 500 companies that split their stocks this year had similar explanations. Cooper Cos., which sells health care products including contact lenses, rolled out a 4-for-1 split in February. Walmart Inc. soon followed. Discount retail giant 3-for-1 split. Old Dominion Freight Line then announced a 2-for-1 split that is scheduled to take place at the end of March.

Beyond the goal of eliminating a stock price shock, splits have the potential to expand the investor pool, thus increasing liquidity and demand. Walmart hit a record high after its split, even as major shareholders in the Walton family sold $1.5 billion worth of stock.

“If Chipotle is going to split the stock, let's get it back to a reasonable price,” said Thomas Martin, senior portfolio manager at Globalt Investments, who overweights the stock. “Even though prices rise with inflation, people are still willing to pay for a burrito! We love this stock and we are getting rid of it.”

Amazing size

Chipotle's stock split proposal has drawn particular attention because of its size.

Other than a few large splits tied to stock offerings, Chipotle right ties Berkshire Hathaway for the largest, according to data compiled by Bloomberg. Berkshire's 50-to-1 B stock split in 2010 was part of its acquisition of the Burlington Northern Santa Fe railroad.

See also  Walmart stock rose after earnings beat, and the retailer's market value surpassed $500 billion

“I thought I misread it,” said Ken Mahoney, president and CEO of Mahoney Asset Management, after seeing the Chipotle ad. “I was using Twitter when it first exploded and people were always making fun of it,” she said, referring to platform X by its former name.

Chipotle had no choice but to pursue a giant split if it wanted to make its stock more accessible to the masses. It's the fourth-highest in the S&P 500, behind AutoZone Inc. and Booking Holdings Inc. and NVR Inc.

who is next

Some market participants expect Nvidia Corp. to be the next company in line for a stock split.

The price of the market-leading AI has risen nearly 90% this year, building on a record high in 2023 and surpassing the level at which it last announced a stock split in 2021. The chip maker's stock has surpassed record highs it reached in early March, but is still… It still trades at over $900 per share.

Read More: Nvidia Looks Ready for Stock Split After $1 Trillion Rally (1)

“Stock splits are really hard to predict,” said Mary Ann Bartels, chief investment strategist at Sanctuary Wealth. “But the higher the price, the more your money is worth if you want to stimulate individual participation among individual investors in your shares.”

-With assistance from Tom Contiliano.

Most read from Bloomberg Businessweek

©2024 Bloomberg L.P

Leave a Reply

Your email address will not be published. Required fields are marked *