Stock splits are often misunderstood. They don’t change the fundamental value of a company; instead, they increase the number of shares available, making them more accessible to a broader range of investors.
It’s similar to peeling and segmenting an orange. The orange remains the same, but the smaller pieces are more convenient to consume.
This technical adjustment — a pure exercise in accounting gymnastics, really — can generate excitement in the market, as it often signals a company’s strong performance and growth potential. For those seeking to take advantage of the buzz around stock splits, here are two outstanding investments on the verge of stock splits right now.
Key details about Chipotle’s upcoming stock split
Let’s start with the most obvious stock splitter. Chipotle Mexican Grill (NYSE: CMG) proposed a 50-for-1 stock split on March 19, and shareholders will vote on the proposal in Thursday’s annual meeting. The measure is likely to pass with an overwhelming majority.
First, I can’t recall a single example of ordinary stock splits getting a thumbs-down in the arena of shareholder approvals. Second, this would be the first stock split in Chipotle’s history, and the share price is getting quite rich. Currently trading at $3,090 per share, there are only four beefier share prices on the American market today.
Again, the split won’t add any value to Chipotle’s market cap, but it will make the stock easier to manage — especially for retail investors with modest stock-buying budgets. Some of us would have to save up for many months before grabbing a single Chipotle share today, and some of the most popular stock brokerages haven’t embraced fractional trades yet. But after the suggested 50-for-1 split, the share price should drop to roughly $62 on the morning of June 26.
Chipotle stands out in the restaurant industry for many reasons. In an era of widespread franchising, Chipotle insists on owning its stores to control product quality and employee relations. Its career-oriented management style reminds me of Costco‘s (NASDAQ: COST), complete with generous worker benefits and solid pay scales.
The incoming stock split suggests that Chipotle’s leadership expect share prices to keep rising for the foreseeable future. The company’s focus on product quality and humane employee relations is setting new standards for the restaurant sector.
I personally can’t eat at Chipotle — cilantro tastes like soap — but it’s an undeniably great company, and the stock split makes it more accessible.
Why Costco should consider a stock split soon
Speaking of Costco, the wholesale retailer should consider a stock split nowadays.
Costco isn’t a complete stranger to stock-splitting operations — it has just been a while. Its last stock split was a 2-for-1 affair on Jan. 13, 2000. Costco’s stock has seen a total return of 2,450% since then, leaving the S&P 500 (SNPINDEX: ^GSPC) index far behind with a mere 477% gain:
Like Chipotle, Costco is known for its employee-friendly environment. Its Kirkland selection of store-brand products is often indistinguishable from leading name-brand options. In fact, they’re often made in the same factories, by the same market-leading producers, but packaged with a Kirkland label and sold at a lower price.
And Costco runs its retail operations near the break-even line. The company is quite profitable anyway, thanks to its membership shopping system. Annual fees accounted for 1.9% of Costco’s total revenue in last month’s third-quarter report, but they also generated more than half of the company’s operating profits.
Now, Costco hasn’t announced a stock split or arranged for a shareholder vote on the idea yet. But with share prices crossing the $800 mark last week, those stubs are getting a bit unwieldy. It would behoove Costco’s board of directors to make the stock more easily reachable for individual investors — including their own workers.
Should you invest $1,000 in Chipotle Mexican Grill right now?
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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Costco Wholesale. The Motley Fool has a disclosure policy.
Stock-Split Watch: 2 Household-Name Stocks That Look Ready to Split was originally published by The Motley Fool
Source: finance.yahoo.com