If You’re a Fan of Chipotle and its Stock Split, Check Out These 2 Dividend Stocks You’ll Love

If You’re a Fan of Chipotle and its Stock Split, Check Out These 2 Dividend Stocks You’ll Love

Chipotle Mexican Grill (NYSE:CMG) recently attracted attention with the announcement of the issuance of a 50-to-1 stock split. This makes sense given that the stock recently hit a new all-time high of over $3,000 per share (before pulling back slightly).

Here’s why Chipotle And two more top restaurants, food and beverages dividend stocks are all worth buying now.

If You’re a Fan of Chipotle and its Stock Split, Check Out These 2 Dividend Stocks You’ll Love

Image source: Getty Images.

Chipotle is a great story with room to run

Chipotle has growth – plain and simple. Its revenue continues to grow at a breakneck pace, but it’s the company’s margins that have really improved in recent years. Chipotle now has about the same operating margin as Starbucks but its growth is much faster.

However, unlike other restaurant chains, Chipotle does not pay dividends as it prefers to reinvest its profits back into the business. This bold strategy can amplify gains, but it also puts pressure on the investment thesis in a downturn.

CMG (TTM) Earnings ChartCMG (TTM) Earnings Chart

CMG (TTM) Earnings Chart

Additionally, Chipotle is a very expensive stock, especially for its size and industry. It’s currently trading at a price-to-earnings (P/E) ratio of almost 66. Granted, the forward P/E is a bit lower, at around 55.

Analyst consensus estimates are for fiscal 2025 earnings per share of $64.78 (before split), which would imply 21% growth over expectations of $53.45 per share for fiscal 2024 .

If Chipotle continues to grow its bottom line at 15% to 20% per year, then its expensive valuation could start to look much more reasonable over time. But there is no denying that the stock price is perfect and should only be considered by investors who believe in the company’s sustained growth and have a multi-year outlook.

McDonald’s has an almost perfect business model

Chipotle is not a bad buy, but McDonalds (NYSE:MCD) could be even better. On the one hand, investors have the opportunity to buy McDonald’s at a P/E of 24.5, a discount from its five-year median P/E of 27.1.

McDonald’s has been increasing its dividend at a fairly rapid pace. The current quarterly dividend is $1.67, about double what it was 10 years ago. In October, McDonald’s increased its dividend by 10%, which is a considerable increase for a company of its size. The increase puts McDonald’s on track to become dividend king by 2026.

McDonald’s has an underestimated business model. Unlike Chipotle, which owns and operates all of its locations in the United States, 95% of McDonald’s locations worldwide are franchised. McDonald’s owns the real estate and receives revenue from rentals, royalties, franchise fees, etc. The company’s structure makes its brand and the perceived revenue franchisees can generate over time more important than its short-term performance or even the business cycle.

MCD Shares Outstanding ChartMCD Shares Outstanding Chart

MCD Shares Outstanding Chart

McDonald’s may not have the growth of Chipotle, but it’s a better investment if you’re looking for consistency. The company has a long track record of rewarding its shareholders. As mentioned, the dividend has roughly doubled over the last decade, but it’s the entire capital return program that really stands out.

Over the past decade, McDonald’s has repurchased more than a quarter of its outstanding shares, illustrating the effectiveness of its business model and how it rewards shareholders with dividends and buybacks in addition to potential capital gains.

In summary, McDonald’s has it all and is worth buying now.

Coca-Cola offers convincing and reliable performance

Coca-Cola (NYSE:KO) hasn’t repurchased shares at the same rate as McDonald’s. And its growth prospects aren’t as good as those of Chipotle or McDonald’s. However, what Coca-Cola does have is stability and the ever important quality of not overextending itself.

Coke played a decisive role in the globalization of soda. But today, the company is mature. There’s not much he can do to grow without spending too much. It must be recognized that she made measured and for the most part effective acquisitions. It has also remained almost entirely in its core business of soft drinks, which is very different from a company like PepsiCowhich owns Frito-Lay, Quaker Oats and many other brands across all product categories.

When the market has a bad year, Coca-Cola tends to outperform. But when the market has a good year, Coca-Cola generally underperforms. Unsurprisingly, Coca-Cola underperformed as the market has performed very well in recent years.

The ideal way to invest in Coca-Cola is not because you are trying to beat the market, but because you want to limit downside risk and earn passive income. Nothing is guaranteed in the stock market, but Coca-Cola is as close to predictability as you can get. The company has increased its dividend for 62 consecutive years.

The stock’s yield is 3.2%, which is a bit higher than other reliable dividend kings. The reliability of Coca-Cola is one of the reasons why Warren Buffett Berkshire Hathaway has owned the stock for over 30 years.

Something for everyone

It’s easy to get seduced by a growth story like Chipotle’s, especially when the entry point (without split shares) becomes lower, through a stock split. However, to have the conviction to hold a stock over time, it is essential to invest in companies that you understand and that match your investment objectives.

Chipotle’s lack of dividend and high valuation won’t please everyone. If you’re more focused on income and value, McDonald’s and Coke might be better choices.

But if you’re a balanced investor, owning shares of all three stocks is a great way to get a little growth, value, and income.

Should you invest $1,000 in Chipotle Mexican Grill right now?

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Daniel Foelber offers the following options: Long $90 May 2024 calls on Starbucks. The Motley Fool posts and recommends Berkshire Hathaway, Chipotle Mexican Grill and Starbucks. The Motley Fool has a disclosure policy.

If You Like Chipotle and Its Stock Split, Then You’ll Love These 2 Dividend Stocks was originally published by The Motley Fool

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