In its 2023 financial year, Greggs (LSE:GRG) generated £1.02 a share in passive income for its shareholders. That was a 73% increase on the previous year and, if repeated in 2024, means the stock is currently yielding 3.7%. This is based on a share price as I write on Friday (28 June) of £27.78.
If this dividend was maintained for a period of 20 years — and the income used to buy more shares in the company — an initial investment of £19,974 (719 shares) would grow to £41,083. At that point, passive income of £126 a month could be earned. This assumes the share price remains unchanged throughout the period.
But Greggs doesn’t have a reputation as an income stock.
Instead, the company has ambitious plans for growth and prefers to retain some of its surplus cash to reinvest in the business.
This has helped its share price increase nearly 1.5 times since September 2020.
An alternative scenario
So what happens if my hypothetical 719 shares grew by a modest 5% a year and the company continued to pay a dividend of £1.02 a share for 20 years?
In these circumstances, my initial investment would grow to £82,284 within two decades. At that point, I could earn £255 a month in passive income.
But Greggs’ recent track record is a little erratic when it comes to dividends.
The company seeks to retain £50m-£60m of cash on its balance sheet. Any surplus — after taking into account the capital expenditure requirements of the business — is then returned to shareholders by way of special dividend.
For two of the past three financial years, it has supplemented its interim and final payouts with a special dividend of 40p.
It therefore doesn’t appear as though a return of £1.02 a share can be relied upon. Of course, dividends are never guaranteed. But it appears to me that Greggs’ special payout is particularly vulnerable to being cut.
| Dividend | FY21 (pence) | FY22 (pence) | FY23 (pence) |
|---|---|---|---|
| Interim | 15 | 15 | 16 |
| Final | 42 | 44 | 46 |
| Special | 40 | – | 40 |
| Total | 97 | 59 | 102 |
Future prospects
And I suspect the company’s share price is unlikely to grow as rapidly as it has done in recent times.
That’s because I think its shares are already quite expensive.
Analysts are expecting earnings per share of 148.7p for the company’s 2024 financial year. This means the stock has a forward price-to-earnings (P/E) ratio of 18.7.
It’s hard to find a company that’s directly comparable to Greggs. But for comparison, Domino’s Pizza Group has a P/E ratio of 11 and the FTSE 100’s multiple is currently around 10.5.
However, the food-to-go retailer has a good reputation with consumers. It was voted number one for value in the YouGov BrandIndex 2023.
It also owns its supply chain. This gives it greater control over its input costs and reduces its reliance on third-parties.
And the first 19 weeks of 2024 have started well. Like-for-like sales growth was 7.4%.
However, despite these positive reasons to invest, I think there are better value opportunities for me elsewhere.
Instead of buying 719 Greggs shares I could purchase other stocks offering a more generous dividend. For example, there are several members of the FTSE 100 currently offering yields in excess of 5%.
That’s why I don’t want to take a position in the sausage roll and pie retailer.
This post was originally published on Motley Fool
