With Greggs on a roll, is this FTSE 250 dividend stock too hot to ignore?

Greggs plc (LON:GRG) has the business to outdo the failing British high street, making it a key buy for value investors, says Tom Rodgers.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In a five-year transformation from bargain basement bakery to food-on-the-go chain, Greggs (LSE:GRG) has been very successful in taking over the high end of the low end.

Like-for-like sales growth has remained consistent since 2013, with chief executive Roger Whiteside willing to branch out and innovate. Dividend yields are respectable, hovering around 3%, while the share price is up over 300% in the last half-decade.

And the brand has clearly evolved. 

It’s no longer just office workers barging into the fray and mums with prams huddling for a pepperoni slice or a steak bake.

Greggs has widened its products on offer to include salads and vegan sausage rolls, and cleaned up its image with a healthier atmosphere featuring open, airy storefronts and cafe-style seating.

The stock is trading at 2,282p at the time of writing, up over 116% for the year.

I would argue, unlike my Foolish colleague Paul, that the underlying business makes Greggs a strong buy even at this price. 

Changing tastes

On the one hand, analysts would have you believe that Britain’s high streets are suffering from terminal decline. 

Bank branches have fallen out of fashion in favour of apps, the shift to online shopping has crucified profits and once-great stalwarts are dropping left, right and centre. 

On the other hand, it’s easy to point to profitable businesses that were saddled with incredible levels of debt. 

It happened to Maplin. That went to the wall after years of operating profits falling into the red. Toys R Us (deceased 2018) went through a leveraged buyout in 2005 which added $5.3bn of debt to its balance sheet. Latterly it suffered from a huge estate of vast, impersonal stores, paying business rates it could not support.

Greggs, by contrast, reported another set of stellar results this week despite being on the same high street that is apparently killing off its rivals.

Interim results for 2019 saw underlying pre-tax profits shoot up from £25.7m to £40.6m and like-for-like sales trend 10.5% higher. 

It also announced a special dividend of 35p with its cash position at £85.9m, compared to £43.5m for the first half of 2018.

This is no flash in the pan.

A Q4 2018 trading update showed a very strong end to the year with sales up 7.2%, while earnings per share growth hit double digits for the first time since 2016. Store openings again beat closures by a ratio of almost three-to-one.

Competition in this sector has weakened considerably as Greggs has shifted its aspirations higher.

The likes of Martins and Poundbakery are still wallowing in the pile-’em-high end of the market, while much of the rest of the debt-saddled opposition have helpfully taken themselves out of the equation by going into administration. 

Breggsit

The falling pound is a concern. A two-year low against the dollar this week is not to be taken lightly.

Almost every sector will be hurt in the short-term if the UK goes out of Europe on 31 October without a deal, promises of vast domestic investment from our new PM notwithstanding.

But a weak sterling is likely to draw in foreign investors looking for bargain stocks. 

And there Greggs will be, with its exceptional sales, outperforming stores and a share price to match.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Tom holds no position in Greggs. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »