Stock splits usually happen after share prices have gone up by large amounts. Let's say that a management team wants to bring its $200 stock down to $100. In that case, it will perform a 2-for-1 stock split. Each share will be worth half as much after the split. But all shareholders will have twice as many shares, keeping overall value the same.
Many companies are doing stock splits these days, including the popular restaurant chain Chipotle Mexican Grill. For perspective, shares of Chipotle traded around $250 per share in 2018 but had risen to above $3,000 earlier this year. Management wanted to bring down the price, so it did a 50-for-1 split in June. Shareholders with just two shares before the split suddenly owned 100.
Companies aren't required to do stock splits -- Berkshire Hathaway trades at more than $600,000 per share and still doesn't intend to do anything about it. Therefore, predicting stock splits is hard.
However, Wingstop(NASDAQ: WING) and Domino's Pizza(NYSE: DPZ) have two of the highest nominal stock prices in the restaurant space, making them candidates to follow in the footsteps of Chipotle.
1. Wingstop
Wingstop is a fast-food chain with more than 2,200 locations around the world. While it does predominately sell chicken wings, the company has tried to bring down food costs in recent years by buying whole chickens and using other cuts, such as thighs prepared like wings, and breasts for sandwiches.
In the first quarter of 2024, nearly 70% of sales were digital. And diners customarily either choose takeout or delivery; comparatively few eat at the restaurant. This means that it runs efficient restaurants when it comes to labor because it doesn't need as many cashiers or customer-facing staff.
Keeping food and labor expenses in check provides Wingstop with attractive unit economics. And this is good for a chain that's mostly run by franchisees. The favorable financials motivate them to lock down more territory and open new locations, allowing Wingstop to grow quickly.
Wingstop opened 65 new locations in the first quarter alone, boosting its number of locations by 14% compared to the same time last year. That's huge for a restaurant chain of this size. Moreover, consumers increasingly love this brand, as evidenced by its 20 straight years of same-store sales growth.
No wonder the stock has gone over $400 per share in recent weeks compared with the $20 it traded at less than a decade ago.
With shares having gone up so much already, Wingstop's management could announce a stock split at some point in the near future.
2. Domino's Pizza
If it's plausible for Wingstop to split its stock at $400 per share, then it's even more plausible for Domino's at more than $500 per share. Roughly a decade ago, it traded at around $70. It has risen thanks to simple growth and other moves that boost shareholder value.
As the largest pizza business in the world already, growth has slowed for Domino's. Revenue was up only 6% year over year in the first quarter of 2024, and it was actually down 1% in 2023.
However, the chain's revenue is high margin because 99% of locations are run by franchisees. The company makes money predominantly from franchise fees, royalties, and supply-chain services for equipment and food.
Domino's revenue is consistent, and its net-income margin is great at almost 12%. And with these profits, management consistently repurchases stock, bringing down the share count and consequently boosting the value of remaining shares. It pays a quarterly dividend that's gone up every year for 11 straight years.
DPZ average diluted shares outstanding (quarterly); data by YCharts.
What does this mean for investors?
So, should investors go ahead and buy shares of Wingstop and Domino's today in anticipation of future stock splits? No, I don't believe that's the right takeaway.
Stock splits don't create shareholder value -- just look at how Chipotle stock has dropped since its split, for example. Therefore, it's not a factor that should be included in an investment decision.
When choosing stocks to buy, investors should think about the industry the company is in, its current and future growth opportunities, the ability to improve profits, as well as what the investment costs from a valuation perspective.
When looking at Wingstop and Domino's, I think both are among the best restaurant chains. But when it comes to growth opportunities, Wingstop might have an edge, considering Domino's already has more than 20,000 locations, limiting its growth potential.
However, the price-to-sales (P/S) valuation for Wingstop is extreme, as the chart below shows, which keeps me on the sidelines.
DPZ PS ratio data by YCharts.
By comparison, the valuation for Domino's is far more reasonable today. It might not have exponential upside as an investment. But the price is right for investors to have modest and consistent returns from here, given the company's history of profits and shareholder-friendly capital allocation.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Chipotle Mexican Grill, Domino's Pizza, and Wingstop. The Motley Fool has a disclosure policy.
