Picture supply: Getty Photographs
I struggled to see the attract of Greggs (LSE:GRG) shares because the inventory pushed upwards in 2024, peaking round August. It was buying and selling with the multiples of a know-how inventory, however working with the margins of a UK meals and beverage firm.
And whereas it delivered spectacular development within the post-pandemic years, a lot of this was enabled by steady retailer expansions. And let’s face it, Greggs is already omnipresent on our excessive streets, so this retailer growth can’t go on eternally.
Nevertheless, the falling share price — down 28% over 12 months — has pushed the dividend yield proper up. Whereas it’s not above the index common, the present 3.3% ahead dividend yield is engaging. And that’s as a result of earnings and dividends are anticipated to proceed rising modestly all through the medium time period.
Let’s take a better look.
The worth proposition
The estimates recommend that Greggs’s earnings will fall round 10% in 2025. That’s actually not what shareholders will wish to hear. Basically the influence of the Price range mixed with decrease like-for-like gross sales development means the corporate’s earnings trajectory isn’t persevering with in a linear format. Nevertheless, the forecasts present earnings recovering to close 2024 ranges by 2027. And through that interval, the dividend will proceed to develop.
| 12 months | EPS (GBP) | Dividend yield (%) | P/E ratio (x) | Internet debt (£m) |
|---|---|---|---|---|
| 2024 | 1.496 | 2.50 | 18.4 | 289.8 |
| 2025* | 1.351 | 3.27 | 15.4 | 369.2 |
| 2026* | 1.394 | 3.41 | 14.9 | 376.3 |
| 2027* | 1.452 | 3.63 | 14.3 | 341.8 |
Briefly, I imagine Greggs is overvalued at 15.4 occasions ahead earnings based mostly on its medium-term development prospects. The price-to-earnings-to-growth (PEG) ratio (kindly excluding the 2024 to 2025 drop) is round 3.5, indicating that the corporate is vastly overvalued.
Nevertheless, when adjusted for the dividend yield, this PEG ratio falls to under two. This nonetheless signifies an overvaluation, but it surely’s one thing savvy dividend buyers might be able to tolerate.
Why contemplate an overpriced inventory?
Nicely, as I’ve stated earlier than, Greggs isn’t for me. Nevertheless, I recognize different buyers have totally different priorities together with dividends.
So, what makes Greggs’s dividend fascinating? Nicely, it’s rising at a superb charge. £10,000 invested right this moment would end in £327 of dividend in 2025, adopted by £341 in 2026 and £363 in 2027.
It’s at present rising at round 5.5% per yr. And if this charge is sustainable, in a decade, an investor can be taking £595 yearly from their preliminary funding.
Nonetheless not for me
Even with the rising dividend, Greggs simply isn’t for me. The valuation metrics don’t add up. Usually, I favor to spend money on corporations the place the PEG ratio falls under one or is considerably under the index common. Greggs doesn’t provide that. What’s extra, I do have issues in regards to the longevity of ultra-processed meals in a rustic the place we’re slowly turning into extra conscious that our eating regimen impacts our well being.