Stock split fever is gripping the market again. Several high-profile companies have split their shares over the past few years, and after a short lull, stock splits are back in fashion. Walmart (WMT 0.35%) split its stock in February on a 3-for-1 split, and Chipotle Mexican Grill (CMG -1.08%) made a stunning announcement last week that it’s splitting its stock in a 50-for-1 split, one of the largest splits ever.
Investors love stock splits, and both of these stocks got a boost after their announcements. But which one is the better buy?
Why are they splitting?
Both Walmart and Chipotle gave similar reasons for splitting their stocks at this time. Walmart CEO Doug McMillon said, “Sam Walton believed it was important to keep our share price in a range where purchasing whole shares, rather than fractions, was accessible to all of our associates.” He said that now was the right to encourage employee participation, given the company’s growth plans.
Chipotle CFO Jack Hartung said, “We believe this will make our stock more accessible to employees as well as a broader range of investors” and added that this was the right time considering Chipotle’s record revenue and profits.
In general, companies split their stocks because high price tags can intimidate investors and make them feel priced out. Some investors also have specific criteria that a too-high price tag won’t meet, or a limited amount of funds to invest regardless of valuation.
Great companies think alike
Walmart has been demonstrating why it’s the leading U.S. retailer in the country by sales. Despite its already immense size, revenue increased 6% year over year, and adjusted earnings per share (EPS) were up from $6.29 in 2023 to $6.62 in fiscal 2024.
Walmart already operates 10,500 global stores, including more than 4,600 in the U.S. alone, but it continues to expand. It’s planning to open 230 stores this year, mostly international, and to convert some U.S. stores to larger locations that can support and generate higher sales. It’s also finding new ways to generate growth, such as its acquisition of streaming platform Vizio to expand its advertising business and compete with Amazon.
Chipotle similarly is demonstrating solid performance. Despite the challenging environment, it reported a 14.3% year-over-year revenue increase in 2023, with comparable sales up 7.9%. That’s a solid mix of growth coming from existing stores as well as a strong contribution from new stores. Its operating margin increased from 13.4% to 15.8%, and EPS rose 38.4% to $44.34.
Chipotle operates more than 3,400 stores as of the beginning of the year, but management sees the opportunity for 7,000 stores in the U.S. alone, all company-operated. It recently inked its first deal for a franchise agreement in the Middle East, and it’s expanding into other international markets.
Growth vs. value
Chipotle stock is much more expensive than Walmart, trading at double Walmart’s price-to-earnings ratio.
CMG PE Ratio data by YCharts
However, investors might justify that because Chipotle stock has tripled Walmart’s gain over the past five years, dividends included. Walmart pays a dividend that yields 1.28% at the current price. That’s below the S&P 500 average, but it’s growing and reliable.
CMG Total Return Level data by YCharts
So which stock split stock is the better buy? I would go with Chipotle. I find it very compelling as a stock that offers growth but doesn’t come with a lot of risk; it has proven itself over time and has plenty of remaining growth opportunities. These kinds of stocks are more expensive because they present so much value.
Still, investors looking for passive income and even greater stability might prefer Walmart stock.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Chipotle Mexican Grill, and Walmart. The Motley Fool has a disclosure policy.
