Greggs (LSE: GRG) shares have provided some tasty returns for long-term shareholders.
Beyond share price growth, the FTSE 250 bakery chain has regularly increased shareholder payouts (barring the pandemic). In fact, the 10-year annualised return is 17.5%, according to AJ Bell!
I’m already a Greggs shareholder. But how much could I expect to receive in passive income by investing five grand in the shares today? Let’s find out.
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Growing income for shareholders
Greggs is a dividend growth stock, which means it consistently increases its dividend payments over time. Such companies often have a strong financial position, stable earnings, and a history of profitable growth.
This is what we see with Greggs, which has low debt and ample cash flow to enable it to invest in growth initiatives and return capital to shareholders through dividends.
Last year, the payout rose 5.1% to 62p per share. There was a special dividend of 40p this year, though they can’t be relied upon (no dividend can).
Next year, the payout is forecast to jump around 6%, following this year’s 10.9% rise.
| Year | Dividend per share |
|---|---|
| 2021 | 57.0p |
| 2022 | 59.0p |
| 2023 | 62.0p |
| 2024 (forecast) | 68.7p |
| 2025 (forecast) | 72.9p |
| 2026 (forecast) | 78.6p |
How much passive income then?
To assess how much income I could be in line for, we need to look at the dividend yield.
As shown above, the forecast payout for 2025 is 72.9p per share. Based on the current share price of 2,704p, the forward dividend yield is just 2.7% (lower than the UK average of about 3.5%).
This means a £5,000 investment could generate £135 in income during the next financial year, followed by £145 the year after. Both prospective payouts are very well-covered by forecast earnings.
Changing eating habits?
There are risks here though, as with any investment. One is that UK diets could change to become healthier over time, which might force Greggs into a risky pivot towards salads (no laughing at the back).
In all seriousness, weight-loss drugs like Wegovy do pose a potential risk. They’ve been shown to supress appetite and cravings for snacks and sugary treats.
While the direct impact of these new drugs remains speculative, the potential to influence consumer behaviour is a valid risk to consider for food businesses like this.
On the other hand, Greggs has shown itself adept at moving with the times. It now sells pasta pots, rice bowls, and other healthier options, as well as the famous vegan sausage rolls.
In my local shop last week, I noticed that more people were buying the lunchtime meal deals (cold sandwich with a hot drink) than anything else. I seemed to be the only one getting a pizza fix!
Will I invest?
I have some cash in my account after selling a couple of stocks recently. So I’m considering adding to my Greggs holding, despite the so-so dividend yield on offer.
The company plans to have 3,000+ shops over the next few years, up from 2,559 today. And it is extending opening hours into the evening, while cementing customer loyalty through the Greggs app.
Longer term, I think the company has under-appreciated pricing power, and can continue delivering the goods for shareholders. The stock appears fairly valued at 18.6 times next year’s forecast earnings.
