Chipotle Mexican Grill, Inc. (CMG) Needs to Dump Cash on Investors NOW

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Most of the time following a corporate gaffe, consumers (as well as investors) forgive and forget; those who say “I’m never going to buy from them again” rarely follow through on the threat.

Chipotle Mexican Grill, Inc.: CMG Needs to Dump Cash on Investors Now

Every now and then though, for whatever reason, a company is unable to move past a high-profile misstep. Sooner or later, shareholders suffer.

Chipotle Mexican Grill, Inc. (NYSE:CMG) fits the latter category all too well. Since it was identified as the source of 55 E. coli infection late last year, sales have fallen precipitously. Last quarter, the top line was down 17% year-over-year, following a 23% year-over-year dip for Q1 … when the outbreak and corresponding worry was at its peak.

Chipotle stock has moved accordingly. CMG is currently down 48% from its October high, and within striking distance of new 52-week lows. Consumers simply can’t shrug it off this time, leaving investors little choice but to assume the worst.

Not that Chipotle stock has to do well for the restaurant chain to do well, but co-CEOs Steve Ells and Monty Moran may want to recognize sooner than later that they have to do something to prop up the value of CMG, even if only as a token gesture. A whopping 99% of Chipotle stock is institutionally owned, and though those professional stock-pickers have been relatively patient so far (all things considered) if they lose patience and start to dump their positions, that could really start to dish out some pain.

Two Obvious Solutions for CMG Stock

For better or worse, there are two avenues Moran and Ells should consider taking as a means of boosting the price of CMG stock. One is buybacks, and the other is dividends.

Gimmicky? Sure, there’s no denying it’s the low road to beefing up the perceived value of Chipotle shares. Neither beggars nor the desperate can be too picky, however.

Just for the record, the restaurateur has already been buying back Chipotle stock. It has spent $1 billion on buybacks over the course of the past twelve months, with the majority of that buyback materializing in Q4 of last year and Q1 of this year, when the E. coli outbreak started taking a major toll. It announced another $100 million had been authorized for the buyback program in May of this year.

And yet, the total float for CMG stock is currently only about 7% less than it was a year ago. It’s not chump change, but for a billion dollars, one would hope for at least a slightly bigger impact for the relatively small $11.1 billion company.

Dividends would be a brand new venture for Chipotle Mexican Grill — it doesn’t pay them at all now. Though most shareholders stepped into their CMG stock position as a growth trade rather than an income-oriented holding, in light of the fact that there’s been no growth recently (and likely won’t be for a while), a little something for their patience would likely be well-received.

Problem: Steve Ells and Monty Moran don’t necessarily have a lot of extra cash to work with.

As of the end of June, Chipotle has access to about $270 million worth of cash or cash equivalents, down from $587 million a year earlier. That’s the result of a post-tax loss of $26 million during Q1, and a (very) sub-par Q2, when it reported after-tax income of only $26 million … down from $140 million a year earlier.

While it’s unlikely the company will slip back into the red now that it’s stabilized the impact of the E. coli gaffe, that’s not necessarily an assurance the bottom line will start to grow in a meaningful way again anytime soon.

In other words, Chipotle cleared per-share profits of 87 cents per share last quarter, with CMG stock presently priced at $391 per share, it would take all of that (and more) to really make for an impressive dividend.

And there’s the rub — Chipotle can’t currently afford to do what it needs to do.

Bottom Line for Chipotle Stock

It’s admittedly a nasty Catch-22. A cash-strapped, thin-margin outfit like Chipotle Mexican Grill can’t afford to waste any cash … cash that’s needed for growth. On the other hand, considering the company’s tarnished reputation right now, it’s unlikely consumers would be terribly receptive to new restaurants anyway. Better to invest in its current, proven locales than take on expensive new development projects.

Either way, unless Chipotle Mexican Grill knows with any real certainty it can soon restore itself to what it was a year ago, it needs to offer up some sort of respectable peace offering with owners of Chipotle stock. They’re getting restless.

And there are enough of them to do some real damage if they decide to throw in the towel.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/08/chipotle-cmg-stock-buyback/.

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