Greggs (LSE:GRG) shares have climbed 55% over five years, significantly outperforming the FTSE 250 index. This is a useful reminder that companies don’t have to be at the cutting edge of technological developments to deliver impressive returns. Sausage rolls can be just as lucrative.
But how does the firm stack up from a passive income investor’s perspective? And can the Greggs share price continue to outperform other FTSE stocks over the coming years?
Let’s tuck in to the detail.
The Greggs dividend
Currently, Greggs shares offer a dividend yield a little lower than 2.1%. At first glance, that might not be an exciting number. It’s below the average across both FTSE 100 stocks (3.6%) and FTSE 250 stocks (3.3%).
However, for investors who prioritise dividend reliability over a high yield, the company’s payout history looks impressive.
Shareholders have been rewarded with consistent passive income for decades. In recent history, the only brief interruption in dividend payments came in 2020 due to the pandemic. Distributions were promptly resumed in 2021.
Furthermore, the dividend looks well covered today at two times forecast earnings. This indicates a wide margin of safety.
If I had a spare £5,000 to invest in Greggs, I’d be able to buy 159 shares at today’s price. That would produce £104.41 in passive income each year, assuming the dividend continues.
Strong growth outlook
However, I think the real appeal of Greggs shares is the potential for capital appreciation, rather than dividend payments. Far from reaching the limits of its growth, the bakery chain has identified plenty of opportunities to boost its bottom line.
Expansion plans are in the works. The group plans to open 140 to 160 net new shops this year. The long-term target is to reach a total of over 3,500 branches in the UK, up from 2,500 today. In addition, keeping more stores open in the evenings is another key objective.
Currently, around half of the firm’s outlets are open past 7pm. Sales made after 4pm are growing faster than average and the business expects this move could add around £180m to its revenues.
Greggs has also increased salaries for its 32,000-strong workforce and doesn’t plan to increase product prices for the remainder of the year. This should help to support employee loyalty and it’s evidence of a firm in robust financial health.
A premium valuation
There’s plenty to like about the direction of travel for Greggs, but arguably much of the growth potential is already priced in today. The shares trade at a forward price-to-earnings (P/E) ratio of 21.4, so they’re not particularly cheap.
The valuation’s well above the average for FTSE 100 and FTSE 250 shares. This could pose risks for further share price growth if the business fails to live up to high expectations.
Should investors consider buying?
Overall, Greggs shares look like a solid pick to me for capital growth and a nice bit of passive income. The dividend might not be outstanding, but I view it as a handy bonus for shareholders rather than the primary reason to invest.
A pricey valuation should give investors some food for thought, but in the round I think this stock could prove to be a tasty long-term investment. It’s certainly one worth considering.
