Shares in Greggs (LSE:GRG) currently come with a 2.25% dividend yield. So to earn £100 per month in passive income, I’d need to invest £54,713.
At first sight, that’s not particularly attractive. But the company’s future growth prospects make this a stock that investors looking for long-term income should consider buying.
Dividend growth
Over the last decade, Greggs has increased its dividend by an average of 11% per year. If that continues at the same pace, the company will be paying out £1.70 a share by 2034.
That represents a 6.29% annual return on an investment at today’s prices. This would be impressive, but investors might well stand to gain in another way.
Greggs share price vs. dividends per share 2014-24
Created at TradingView
Since 2014, the Greggs share price has risen in line with its dividend, including a drop in 2020 during the pandemic. So if the dividend keeps growing, I expect the share price to follow.
This would put investors in a strong position in terms of being able to sell their shares for a substantial profit. The question is whether or not the company can keep growing.
Expansion
The best reason for thinking it can is the firm’s ambition to add to its store count. Greggs is aiming for 160 new outlets this year and more than 3,000 over time.
This sounds promising, but there are important risks – and not just the usual ones about inflation driving up costs. Right now, Greggs is at a point where it’s constrained by supply.
In other words, it’s selling all the steak bakes and sausage rolls it can produce. That means increasing its store count isn’t as simple as finding new locations and acquiring them.
The company is going to have to invest in more manufacturing capacity. This is expensive and is likely to cause returns on invested capital to fall in the short term.
Risks and rewards
The danger for Greggs shareholders is that higher capital expenses leave less free cash for dividends. But there are reasons for patient investors to be positive over the long-range outlook.
The company has built a brand around providing unpretentious value for money. And this is beneficial when it comes to expansion.
In general, the lower the price of a company’s core product, the more outlets it can profitably open. This means 3,000 Greggs stores might be a realistic target.
There’s also a benefit in terms of resilience. A low price point typically makes demand stable in a recession when consumers are thinking carefully about their spending.
Passive income
With a dividend of 60p per share, I’d need 2,000 Greggs shares to earn £100 per month in passive income. But that number should fall as the dividend grows.
I wouldn’t wait around, though. As the dividend increases, I’d expect the share price to do the same thing.
The company has a business model that should hold up well in a downturn as well as strong growth prospects. I think that looks like a winning combination for investors to consider.
