It didn’t make a sound. It didn’t shake the ground. But after the market closed on Tuesday, one of the biggest stock splits ever took place.
Chipotle Mexican Grill (NYSE: CMG) announced on March 19, 2024, that its board of directors approved a 50-for-1 stock split. On June 6, the restaurant operator’s shareholders approved the split. Following the market close on June 25, all shareholders of record as of June 18 received 49 additional shares for every share they owned.
What will happen now after Chipotle’s massive 50-for-1 stock split? Here’s what history shows.
Throw out the history books?
The history of Chipotle’s stock splits shows… nothing. Since the company’s founding in 1993 and its initial public offering in January 2006, Chipotle had never conducted a stock split until this week.
Throughout much of Chipotle’s history, there wasn’t a pressing need for a stock split. The Mexican restaurant chain’s share price didn’t rise above $1,000 until 2020. However, Chipotle stock skyrocketed over the last few years, including a gain of close to 40% in 2024 that pushed the share price above $3,000.
Chipotle Chief Financial and Administrative Officer Jack Hartung noted in March that the stock split “comes at a time when our stock is experiencing an all-time high driven by record revenues, profits, and growth.” The company’s share price, revenue, and profits subsequently increased to even higher levels.
Reasons to expect a surge
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 are reasons to be encouraged about what might happen next with Chipotle stock based on that history.
Bank of America‘s Research Investment Committee examined how stocks that split typically performed historically. This group found that stocks trounced the S&P 500 during the 12 months after announcing a stock split 25% to 12%.
Granted, the outsized gains haven’t been quite as big in recent years. Since 2010, the average 12-month return for stocks after announcing stock splits has been roughly 18% compared to 13% for the S&P 500, based on Statista’s reporting of data compiled by BofA, Bloomberg, and Global Financial Data. However, stock-split stocks still beat the market.
Why has this been the case? Part of the reason why companies conduct stock splits is that they hope the lower share price attracts retail investors who remained on the sidelines when the share price was inordinately high. There could also be a self-fulfilling prophecy dynamic at play. Investors who expect a stock to rise after a stock split could be more inclined to buy the stock, contributing to buying pressure that pushes the share price higher.
Color me skeptical
History indeed seems to say that Chipotle stock could soar over the next several months. However, color me skeptical.
For one thing, Chipotle’s share price has already risen close to 14% since the announcement of its stock split in March. That’s not too far below the average increase of 18% since 2010 over the 12 months after a stock split announcement reported by Statista.
Also, trading fractional shares has become more widely available over the last seven years. This could reduce the positive impact of stock splits.
Most importantly, though, Chipotle’s valuation could be problematic. The stock trades nearly 60 times forward earnings. Neither the company’s revenue nor earnings are growing briskly enough to warrant such a premium price. History usually isn’t 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 has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America and Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
What Will Happen After Chipotle’s Massive 50-for-1 Stock Split? Here’s What History Shows. was originally published by The Motley Fool
Source: finance.yahoo.com