Could 719 Greggs shares give me £126 a month of passive income?

Our writer takes a look at the UK’s leading food-to-go retailer and wonders whether he should buy its shares for passive income.

| More on:
Passive income text with pin graph chart on business table

Image source: Getty Images

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 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.

DividendFY21 (pence)FY22 (pence)FY23 (pence)
Interim151516
Final424446
Special4040
Total9759102
Source: company reports / FY = financial year

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.

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.

James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Domino's Pizza Group Plc, Greggs Plc, and YouGov Plc. 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

Passive income text with pin graph chart on business table
Investing Articles

£9,000 in savings? Here’s how I’d aim to turn that into a £10,548 passive income each year!

Buying high-quality, high-yielding shares can generate a big passive income over time, especially if the dividends are used to buy…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

As AstraZeneca’s share price dips 4%, is it time for me to buy more?

Despite its 12-month increase, AstraZeneca’s share price appears very undervalued to me, and looks set to rise on strong growth…

Read more »

Investing Articles

FTSE 100 or S&P 500: where should I invest?

UK investors are often drawn to the high growth of US stocks. But there are pros and cons to be…

Read more »

Investing Articles

2 of the best US growth and dividend stocks to consider!

These heavyweight US stocks have been delivering tasty investor returns for decades. Here's why they could remain great picks for…

Read more »

Investing Articles

I reckon these 2 penny shares are hidden gems worth a closer look!

Some penny shares are well-known, whereas many others go under the radar, but that doesn’t necessarily mean they aren’t potentially…

Read more »

Investing Articles

Just released: our 3 best dividend-focused stocks to buy before August [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

2 FTSE 100 shares with blockbuster yields investors should consider buying

Our writer has noticed that these FTSE 100 shares offer mammoth dividend yields, and reckons investors should take a closer…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Down 36% and yielding 7.8%, is this FTSE 250 share a bargain?

Christopher Ruane looks at a FTSE 250 share with a sizeable dividend yield and a recent record of dividend growth.…

Read more »