The COVID-19 crisis has created many winners and losers as the world’s consumers reset some behaviors, and accelerated the shift to digital. That has occurred in industries like retail, but also in restaurants, with the chains with heavy digital presences in place before the crisis thriving, while others simply try to keep up.

One of the restaurant stocks firmly in the former category is Chipotle Mexican Grill (CMG), as shares have gained more than 50% in 2020, and are up more than 200% since the bottom in March. Chipotle has shown the ability to grow rapidly in a variety of environments, and that has generated huge returns for shareholders over time. However, Chipotle doesn’t pay a dividend to shareholders.

Chipotle is relatively unique in this regard, as many large restaurants have begun to pay dividends to shareholders. Some have done so for a very long time. For example, McDonald’s (MCD) is the largest publicly-traded restaurant in the world, and it has raised its dividend for over 40 years in a row. McDonald’s is a Dividend Aristocrat, a group of 65 stocks in the S&P 500 with 25+ consecutive years of dividend increases.

Chipotle does not pay a dividend for now, but this could change at some point. Like McDonald’s, Chipotle is highly profitable with strong cash flow and one of the top brands in the industry.

In this article, we’ll take a look at Chipotle’s business model to see if the company will ever pay a dividend.

Business Overview

Chipotle is a very large restaurant chain by any measure, having grown by leaps and bounds since its founding in 1993. The company owns and operates over 2,700 restaurants, with the vast majority being in the US, but Chipotle has expanded internationally as well to select markets. Chipotle is unique in that it does not franchise; it owns every one of its restaurants.

The company serves Mexican food with a small menu that is highly customizable by the user, boosting its appeal over chains with fixed menus. Chipotle prides itself on responsibly sourced, sustainable ingredients without artificial preservatives or other processing techniques.

Chipotle has nearly 100,000 employees, produces about $6 billion in annual revenue, and trades with a market capitalization of $35 billion.

Chipotle reported its third-quarter earnings on October 21st, with the report being another smasher by a company that is accustomed to huge success. Total revenue was up 14% year-over-year to $1.6 billion during a time when many restaurants are struggling to match last year’s levels. Comparable sales were responsible for over half of the total revenue gain at 8.3%, with the balance coming from new stores. The company added 44 new stores and closed three during the period, and noted that it still had 10 stores that were closed from COVID-19.

Digital sales grew more than 200% and accounted for almost half of total revenue during the quarter, solidifying the fact that Chipotle is the undisputed leader in the restaurant space when it comes to digital channels. Earnings-per-share fell 1.6% year-over-year to $3.76 as operating margins declined slightly, but overall, investors cheered the report.

Growth Prospects

Chipotle has a history of truly outstanding growth, which helps explain why the stock is trading at more than 5X its annual revenue today. For example, from the time the company went public back in 2006, to the end of 2015, earnings-per-share compounded at an annualized rate of more than 31%. That is an unbelievable amount of growth for any company, but in particular, for a restaurant chain.

The company then went through a huge food safety crisis in the 2016 to 2018 time frame where it had several instances of food safety lapses, making hundreds of people sick with norovirus and other food-borne illnesses. These circumstances saw consumers walk away from Chipotle and with it, earnings plummeted. Chipotle still hasn’t recovered to its all-time high of earnings-per-share set in 2015, and it won’t do so in 2020 either. However, we see that high in earnings being taken out soon, most likely in 2021.

Chipotle is well on its way to recovering its lost earnings because it has focused on food safety, and has told customers the story of how things went wrong, and how it is making sure it won’t happen again. That has clearly resonated with customers as the company’s growth numbers are quite high once again.

We see Chipotle as having outstanding growth prospects from here and expect to see annualized earnings-per-share growth in excess of 20% for the foreseeable future. This growth will be achieved with a combination of new stores, higher comparable sales, margin expansion, and the continued adoption of the company’s digital solutions.

Chipotle’s footprint is already massive at 2,700+ stores, but it has room to continue to expand for years to come. The company is experimenting with digital-only restaurants for the first time, which are simply stores with no dining area or ordering line. This will allow Chipotle to enter markets that cannot support a full-size store, and greatly increase the number of units the company can have over time.

Also in support of its digital efforts is the company’s “Chipotlanes”, which are simply drive-thrus at its new stores. Chipotle began experimenting with drive-thrus a couple of years ago and found huge success with them, so it is expanding the drive-thru program at every store where there is space to do so. This has made it easier and more convenient for users to visit Chipotle when they are in a hurry and supports its strategy of digital-first.

These factors, plus a concept that consumers flock to, have created the recipe for ever-higher comparable sales, which has also driven margins higher over time. Chipotle’s operating costs are largely fixed, and its food costs can be leveraged down with higher volumes, leading to more profit on each dollar of revenue. The company has strong operating margins, but there is further room to leverage down labor costs and back-office support costs, for instance.

Competitive Advantages

Competitive advantages are difficult to come by in the restaurant industry, but Chipotle seems to have figured it out. The company’s mission of sustainable, unprocessed food resonates with consumers that are increasingly interested in such a proposition. This, along with the infinitely customizable menu, creates a value proposition for consumers that is unique to Chipotle.

The company’s brand recognition is massive as well, having been a leader in the space for many years already; this has afforded Chipotle scale advantages in buying ingredients, back-office support, etc. We see this advantage extending as the company continues to lead the industry in its digital-first approach that is clearly resonating with consumers.

Will Chipotle Ever Pay a Dividend?

Given all of this growth, Chipotle produces a high level of earnings, as well as cash to fill its coffers. However, up to this point, the company has been using that cash to invest in digital capabilities, marketing, menu expansion, and of course, new stores. With the growth in the store base still very much underway, we don’t see the company as wanting to use cash to pay a dividend in the near future.

The digital transformation has seen unbridled success and we believe that as Chipotle continues to expand its footprint, it will do so with a digital-first mindset. This requires capital expenditures, so we see earnings and cash flow being directed in this space for the foreseeable future.

However, at some point, the store base will reach saturation, and with the rate that Chipotle is growing earnings, it seems likely that its cash generation will greatly exceed its ability to reinvest it in the business. Large, mature restaurant chains pay dividends to shareholders for this very reason, and at some point, Chipotle will mature.

Therefore, we do expect Chipotle to eventually return cash to shareholders via dividends. However, we also expect that point in time to be many years from now since the company is still very much in its growth stage.