Can Greggs' Rising Dividend Beat The FTSE?

Greggs' five-year payout has already out-paced that of the wider market.

The last few years have been tough for investors relying on the FTSE 100 (UKX) to deliver a rising dividend payout.

Looking at the iShares FTSE 100 ETF (LSE: ISF), an exchange-traded fund that tracks the benchmark index, we can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:

Still, there are companies out there that, despite the banking crash and gloomy economy, have managed to deliver a rising dividend throughout the last five years. One such name is Greggs (LSE: GRG).

If you don't know, Greggs is a national bakery chain with cafe/bakery shops the length and breadth of Britain. It's enjoyed considerable success expanding from just one premise in 1951 and now boasts 1,591 outlets.

With the shares at 493p, the market cap is £499 million. This table summarises Greggs' track record:

As you can see, the dividend has increased by 38% during the last five years -- equivalent to an average 8.4% compound annual growth rate.

Despite impressive expansion so far, Greggs continues an active programme to increase its market share. In just the 19 weeks to 12 May, for example, the company opened a net 20 new shops and is pushing into new routes to market like the new 'Greggs Moment' coffee shop format, motorway services shops, and a frozen food offering in partnership with Iceland Foods.

But what really bakes my metaphorical cake about Greggs is the sheer simplicity of its business model: it puts repeat-purchase consumer food staples where, and when, its customers wants them at a reasonable price. It's a simple-to-produce product that will never go out of fashion, in my view. What's more, the business is cash-generative and cash flow positive in the sense that the company gets the cash before the customer consumes the product, and not the other way around.

Reliable flows of cash like that are just what's needed to sustain a progressive dividend policy.

Greggs' dividend growth score

I analyse three different features of a company to judge whether its dividend can continue to rise:

1. Dividend cover: the last dividend was covered just over twice by earnings. Score 4/5

2. Net cash/debt: the balance sheet is debt free with around £19m cash. Score 5/5

3. Outlook/recent trading: it's steady as she goes according to the directors. Score 4/5

Overall, Greggs scores 13 out of 15 for me, and I reckon the firm's dividend can continue to out-pace the dividends from the FTSE 100.

Foolish takeaway

Although consumers are under pressure, there's very little that gets in the way of a morning coffee and a bacon roll. Add to that Greggs' debt-free status, impeccable record of cash generation and continuing programme of expansion, and the outlook for the dividend is good in my view.

Right now, the forecast full-year earnings for Greggs is around 41p per share, which supports a possible income of about 4.2% for 2012. For such a reliable dividend payer, that yield looks attractive to me.

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> Kevin owns shares in Greggs.