As with most dividend-paying stocks, the cash rewards on Greggs (LSE:GRG) shares collapsed following the Covid-19 outbreak. In this case, dividends were stopped in the financial year to January 2021 after lockdowns shuttered its shops.
But the FTSE 250 baked goods retailer has rebuilt its dividend policy following the pandemic. Annual payouts have risen by low-to-mid-single-digit percentages. And last year, Greggs also paid a special dividend to investors.
City analysts expect dividend growth to speed up over the next few years too:
| Year | Dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2024 | 68.73p | 11% | 2.6% |
| 2025 | 72.86p | 6% | 2.7% |
| 2026 | 78.62p | 8% | 2.9% |
As we saw during the pandemic, dividends are never guaranteed. So I need to consider how realistic these forecasts are.
Based on this — as well as Greggs’ share price outlook — should I buy the superstar baker for my portfolio?
Strong forecasts
The first, and simplest, thing to consider is how well predicted dividends are covered by expected earnings.
In each of the next three years, Greggs is expected to increase earnings by 7-8%. So pleasingly, dividend cover registers at 2 times over the period. A reading of 2 times or above provides a decent cushion in case earnings underwhelm.
The next thing to look at is the strength of the company’s balance sheet. On this front, Greggs also scores highly.
The firm has no debt on the books, and ended the first half of 2024 with a cash balance of £141.5m. This encouraged it to hike the interim dividend almost 19% year on year, to 19p per share.
Greggs did warn however, that it expects cash to fall as it continues its store rollout programme and invests in manufacturing and distribution.
Heavy fall
So on balance, Greggs looks in great shape, in my opinion, to hit current dividend forecasts. But does this make the company a good investment?
After all, the firm’s share price has fallen sharply since 1 October’s third-quarter trading statement. These showed like-for-like sales growth cool to 5%. Revenues could continue to cool too, if inflationary pressures crimp consumer spending.
Yet on balance, I think Greggs is an attractive stock to buy right now. In fact, I’ve just bought it on the dip for my Self-Invested Personal Pension (SIPP).
A top dip pick
It’s my view that the market has overreacted to news of slowing sales. Following its price slump, Greggs’ price-to-earnings (P/E) ratio has fallen back below 20 times, to 19.8 times.
I think this valuation is more than fair for a stock of this calibre. Past peformance is no guarantee of future returns, but its share price has rocketed 340% in value since 2014, as steady expansion has supercharged profits.
Combined with dividends, the total return approaches 500% over the period.
There’s good reason to expect Greggs’ share price to rebound, in my opinion. Ambitious expansion continues, with the company building capacity for 3,500 shops, up from 2,560 shops today. This includes building stores in travel locations and increasing the number of franchise outlets.
On top of this, the retailer’s quest to boost its delivery and ‘click and collect’ services is paying off handsomely. And it’s planning an assault on the highly lucrative food-to-go market in the evenings.
