I’ve been a fan of Chipotle Mexican Grill (NYSE:CMG) stock for some time. I like its riches to rags to riches story. More importantly I liked the transparency that the company showed in restoring customer confidence after a food safety crisis.
However, when I saw its current price of $878.39, some lyrics from Usher came to my head: “OMG!”
It’s not that I was totally unaware of its price. But I looked at its market capitalization of $24.46 billion and wondered, what is going on? And more importantly, is it sustainable?
Analysts have differing views. Chipotle is a heavily scrutinized stock that is covered by 33 analysts. With 16 analysts giving the stock a hold and 14 giving it a buy, sentiment is nearly 50/50. And the consensus price target tends to confirm that. At $827.40, many analysts are seeing that the stock’s recent run may be over.
But what a run it’s been. Chipotle stock has climbed over 65% in the last 12 months. And they’ve done it through legitimate sales growth. The company made an aggressive push into digital sales. It was a necessary initiative. It wasn’t that Chipotle was ever “slow” per se, but it wasn’t “grab and go” either. But being able to order online and pick-up at the restaurant is another solid move.
Transparency Has Been Chipotle’s Friend
I’ve given my opinion on why Chipotle was able to recover from food safety scandals that have taken down other restaurants. Charles D. Lindsey, associate professor of marketing at the University of Buffalo School of Management describes how Chipotle has been able to successfully win back customers and gain new ones.
I think the foundation was put in place during 2016 by the relatively decisive way in which Chipotle responded to the various food crises. They closed stores, brought in food safety consultants, and were open and transparent in their PR. This restored and even increased trust and confidence in the brand.
Going forward, the brand has done a good job of investing in tech, exploring new delivery plus click and pick options (such as Chipotlanes), offering new menu items, and introducing a new loyalty program (which doubled digital sales).”
Is Aggressive Growth Still the Answer?
Ever since the company briefly had McDonald’s (NYSE:MCD) as an investor, its plan has been to aggressively expand. In 2019, the company announced plans to open between 140 to 155 new stores. And after the company’s earnings report, Chipotle was still trumpeting the potential to open as many 5,000 total restaurants.
But now, the company seems to be walking that back a little bit. And maybe some of that is due to the emergence of its Chipotlanes, which is a kind of drive-thru for pre-orders. However, in their last earnings report, the company reported that the Chipotlanes initiative was taking a little longer to launch.
And so, I’m left looking at that stock price and looking at that market cap and wondering if it might be time to pump the brakes on the growth strategy and maybe focus on rewarding shareholders with a dividend. This was a strategy that our own Louis Navallier suggested back in September. Investors can find stocks that have a much better valuation, and get a dividend to boot.
Back in 2016, InvestorPlace contributor James Brumley hypothesized that Chipotle should issue a dividend. The company was struggling to find its footing amidst issues with food safety. The problem then was the company was cash strapped. So even if it wanted to issue a dividend (it didn’t), it wasn’t really an option.
But oh, how times have changed. The company is generating cash at a healthy rate. According to Seeking Alpha, based on CMG’s estimated forward earnings per share of $13.96, they could offer a yearly dividend of $4.19 per share at a payout ratio of 30%. Their dividend yield would be 0.48%.
The Bottom Line on Chipotle Stock
Chipotle is doing many things right, but when you start issuing lofty goals and not delivering (particularly when you don’t even come close), analysts will start to take notice. And more importantly, when it comes to opening new stores, it’s fair that investors will ask where the growth is coming from?
Chipotle could fend off a lot of those questions, by taking its foot off the accelerator and giving shareholders a dividend.
Because ultimately transparency, or the lack thereof, can cut both ways.
As of this writing Chris Markoch did not hold a position in any of the aforementioned securities.
