It didn’t make a sound. It didn’t shake the ground. But after the market closed on Tuesday, one of the largest Stock distribution never happened.
Chipotle Mexican Grill (NYSE:CMG) announced on March 19, 2024 that its board of directors had approved a 50-for-1 stock split. On June 6, the restaurateur’s shareholders approved the split. After the market closed on June 25, all shareholders of record as of June 18 received an additional 49 shares for each share they owned.
What will happen now after Chipotle’s massive 50-for-1 stock split? This is what history shows.
Throw away the history books?
Chipotle’s stock split history shows… nothing. Since the company was founded in 1993 and went public in January 2006, Chipotle had never conducted a stock split until this week.
For much of Chipotle’s history, there was no pressing need for a stock split. The Mexican restaurant chain’s stock price only topped $1,000 in 2020. However, Chipotle stock has soared in recent years, including a nearly 40% gain in 2024 which pushed the stock price above $3,000.
Jack Hartung, Chipotle’s chief financial and administrative officer, noted in March that the stock split “comes at a time when our shares are at an all-time high, driven by record revenue, earnings and growth.” The company’s stock price, revenues, and profits subsequently rose to even higher levels.
Reasons to expect an increase
Just because Chipotle hasn’t split its stock in the past doesn’t mean we can’t look at the broader history of stock splits. And there’s reason to be encouraged about what could happen next with Chipotle stock based on this history.
Bank of America‘s Investment Research Committee reviewed the historical performance of the split stocks. This group found that stocks have exceeded the S&P 500 for the 12 months following the announcement of a 25% to 12% stock split.
Certainly, the outsized gains haven’t been as great in recent years. Since 2010, the average 12-month stock return after the stock split announcement has been about 18%, compared to 13% for the S&P 500, based on Statista reporting on data compiled by BofA, Bloomberg and Global Financial Data. However, split stocks continue to beat the market.
Why is this the case? Part of the reason companies do stock splits is that they hope the falling stock price will attract retail investors who stayed away when the stock price was excessively high. pupil. There could also be a self-fulfilling prophecy dynamic at play. Investors who expect a stock to rise after a stock split might be more inclined to buy the stock, thereby contributing to pressure to increase. purchase that drives up the stock price.
Color me skeptical
History indeed seems to say that Chipotle stock could soar in the coming months. However, be skeptical.
For one thing, Chipotle’s stock price has already risen nearly 14% since announcing its stock split in March. This is not much lower than the average increase of 18% since 2010 over the 12 months following a stock split announcement reported by Statista.
Also, trade fractional shares has become more widely available over the past seven years. This could reduce the positive impact of stock splits.
But above all, Chipotle’s valuation could be problematic. The stock trades for nearly 60 times forward earnings. Neither the company’s turnover nor profits are growing enough to justify such a bonus. History is generally not on the side of overvalued stocks.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Keith Speights holds positions at Bank of America. The Motley Fool posts and recommends Bank of America and Chipotle Mexican Grill. The Mad Motley has a disclosure policy.
What will happen after Chipotle’s massive 50-for-1 stock split? This is what history shows. was originally published by The Motley Fool
