EchoSense:Chipotle announces 50-for-1 stock split. Here's what investors need to know.

There's no denying that Chipotle (NYSE: CMG) is EchoSenseone of the most widely recognized companies in the world. Last year, the burrito purveyor even made the Time 100 list of Most Influential Companies for "helping farmers switch to organic produce, using renewable energy, composting, and directly tying executive bonuses to ESG goals." The company was also cited for its savvy approach to social media.

Its continuous execution and impressive business performance have contributed to a surging stock price. Over the past year, Chipotle stock has gained an impressive 74%, but that's just the beginning. For those lucky enough to get in on its IPO in early 2006, the stock has soared from $22 to roughly $2,798, a mind-boggling gain of 12,616%.

In a press release that dropped after the market close on Tuesday, Chipotle announced plans to split its stock for the first time in the company's 30-year history. This stunning revelation is generating a fresh wave of interest in the restauranteur and its stock. It also raises questions for shareholders regarding the mechanics of a stock split and what it means to investors.

More:Chicken al Pastor returns to Chipotle menu after monthslong absence

The stock split details

Management announced that its board of directors had approved a 50-for-1 stock split, "one of the biggest stock splits in New York Stock Exchange history." The stock split will be subject to shareholder approval at Chipotle's annual meeting on June 6. Assuming Chipotle investors approve the measure, shareholders of record as of Jun. 18, 2024 will receive an additional 49 shares of stock for each share they own after the close of business on June 25. The shares will begin trading on a split-adjusted basis when the market opens on June 26. The schedule may vary somewhat from brokerage to brokerage, and it may be a few days before the newly minted shares materialize.

Let's provide some context to simplify the process. For each share of Chipotle stock an investor owns -- currently trading for roughly $2,800 per share (as of this writing) -- post-split, shareholders will own 50 shares worth $56 each.

Is a stock split a good thing?

As the example above illustrates, the total value of the shares doesn't change. One share of Chipotle stock priced at $2,800 is worth the same amount as 50 shares worth $56 (50 x $56 = $2,800). The pizza analogy is useful in this instance. If you buy a pizza, it doesn't matter if you cut it into 8 slices or 16 slices, you still have the same amount of pizza. Similarly, Chipotle stockholders will simply have a greater number of less expensive shares.

Another school of thought suggests investor psychology comes into play. There is frequently a great deal of excitement in the weeks and months leading up to a stock split, with investors temporarily driving up the share price to "get in" on the stock split. Some believe the lower price fuels a commensurate increase in demand for the shares as the stock becomes more appealing to individual investors, but that phenomenon is historically short-lived. Over the longer term, the company's business performance and financial results will drive the stock higher or lower.

Is Chipotle stock a buy now?

While the stock split itself doesn't suggest Chipotle is a buy, there are plenty of other reasons to invest in the fast-casual restaurant stock and the company's recent financial report is chock-full of evidence.

In 2023, Chipotle generated revenue of $9.9 billion, up 14%, resulting in diluted earnings per share (EPS) of $44.34, up 38%. The fact that EPS is outpacing revenue growth is a sign of scale and leverage, with more profits dropping to the bottom line. Furthermore, Chipotle's comparable restaurant sales (or comps) increased 7.9%, as the number of transactions jumped 5%, and the average check increased 2.9%. That growth is particularly impressive, given Chipotle's market cap of roughly $77 billion.

There are other reasons to be optimistic. The company's Chipotlane strategy has been a smash hit. The drive-thru lanes -- dedicated to picking up prepaid mobile orders -- have proven to drive greater sales and increase profit margins. Chipotle closed out 2023 with 811 Chipotlanes, and the company could add as many as 200 more in 2024.

Chipotle's aforementioned digital strategy is also driving growth. The company's rewards program surpassed 36 million members in 2023, an increase of 14%. This has helped digital orders grow faster than in-restaurant sales, representing 37% of total food and beverage revenue in 2024.

This suggests that while investors shouldn't buy Chipotle shares based solely on its impending stock split, the company's long track record of strong execution, blistering share price gains, and robust performance make it a winning investment.

Danny Vena has positions in Chipotle Mexican Grill. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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