Chipotle’s Historic Stock Split Proposal Highlights Bull Run
Chipotle Mexican Grill Inc. has recently made headlines with its proposed historic stock split, demonstrating the extent of this year’s bull run. The fast-food chain aims to make its shares more affordable and accessible to a wider range of investors who enjoy its popular burritos.
If approved by shareholders at Chipotle’s annual meeting on June 6, the 50-to-1 split will become one of the largest ever on the New York Stock Exchange. The post-split trading is expected to commence on June 26. While the split will not alter the company in any significant way apart from its share price, it has generated excitement and caused Chipotle shares to rally to new highs. This surge builds upon a remarkable upward trend that has seen the stock rise by over 26% this year.
Howard Silverblatt, a seasoned Wall Street veteran and senior index analyst at S&P Dow Jones Indices, describes Chipotle’s stock split as unprecedented. With almost half a century of experience, he admits that he has never witnessed a split of such magnitude. A stock split involves dividing a share into multiple slices without affecting its overall value or ownership pool. Companies often pursue splits or reverse splits to influence perception. High stock prices can discourage retail investors, while excessively low prices may create a perception of a cheap and undesirable company.
In recent times, stock splits have become less popular due to the rise of fractional share buying. In 2020, only four companies in the S&P 500 Index executed stock splits. However, as stock markets continue to soar in 2024, companies are facing an optics challenge with eye-catching share prices. While only two companies have officially split their stock this year, they recognize that it can create more demand among retail customers by lowering the stock’s dollar value.
Chipotle’s rationale for the stock split is to make its shares more accessible to employees and a broader range of investors. With a price tag of nearly $2,900, a single share of Chipotle is costlier than the average American homeowner’s monthly mortgage payment. A 50-for-1 split would bring the share price down to approximately $60, making it more accessible and comparable to a takeout order.
Similar explanations were given by the two S&P 500 companies that split their stocks this year. Cooper Cos. Inc., a health-care products provider, enacted a 4-for-1 split in February. Walmart Inc., a discount retail giant, followed suit with a 3-for-1 split. Old Dominion Freight Line also announced a 2-for-1 split set to occur at the end of March.
Aside from eliminating share-price sticker shock, stock splits have the potential to expand the investor pool, increase liquidity, and drive demand. Walmart’s shares reached new heights following the split, even as major shareholders from the Walton Family sold $1.5 billion worth of stock. Thomas Martin, senior portfolio manager at Globalt Investments, expresses his enthusiasm for Chipotle’s stock split, viewing it as an opportunity to restore a reasonable stock price that aligns with the company’s popularity and performance.
Chipotle’s stock-split proposal stands out due to its remarkable size. Excluding a few larger splits linked to share offerings, Chipotle’s adjustment is on par with Berkshire Hathaway’s largest split. In 2010, Berkshire announced a 50-to-1 split of its B shares as part of its acquisition of railroad Burlington Northern Santa Fe.
Market participants support the possibility of Nvidia Corp. being the next company in line for a stock split. The leading artificial intelligence company has experienced a 90% surge in share price this year, following a record-breaking 2023 performance. Although the stock has retreated from its all-time highs in early March, it still trades for over $900 per share.
Predicting stock splits is no easy task, but the higher the price, the greater the potential impact of individual participation among retail investors. Mary Ann Bartels, chief investment strategist at Sanctuary Wealth, highlights the appeal of attracting retail investors to high-priced shares.
As we move forward, it will be interesting to monitor the trend of stock splits and their effect on the accessibility and appeal of companies’ shares. While companies strive to strike a balance between affordability and perceived value, these splits can have broad implications for the investor pool, stock liquidity, and overall demand. As the market evolves, it is crucial for companies to closely analyze the dynamics of their share prices and make strategic decisions that resonate with both investors and consumers.
References:
1. Bloomberg Businessweek. ©2024 Bloomberg L.P.