It’s hard to walk down a British high street these days without seeing a Greggs (LSE: GRG) or four. The number of bright yellow and blue signs of the nation’s largest bakery chain seems to be on a neverending upward trend. Their rise fuelled by the country’s penchant for cheap sausage rolls, cheap cups of coffee, and the like. Greggs shares are also listed on the London Stock Exchange. This means I could invest in the company myself and have a stake in any future success.
I’ve passed over the shares before, mostly because of a pricey valuation, but things might be a little different this time. The shares have taken quite a hefty tumble of late, down 33% since September. This is not a market fall either, as the FTSE 100 is up over the same timeframe. A lucrative buying opportunity perhaps?
Passive income potential
Well, the first thing that stands out to me is the dividend. At previous highs, the yield was nothing to write home about. After the recent drop, Greggs shares pay 3.49%. Remember, the lower the share price, the higher the dividend as a percentage of my stake.
If an investor had a target of £1,000 passive income per year, they would need roughly 1,449 shares for a total cost of £30,791.
That’s around what I might expect from a typical FTSE 100 company – the index’s current average yield is 3.5%. However, it is unusually high for a company with solid growth prospects. Greggs opened 200+ new locations last year and is on course for 150 this year. This might be one of the better all round stocks for growth and dividends combined. Dividends are set to go up in the years ahead, too, which could increase passive income.
Let’s back up for a second. That near-40% drop isn’t something to gloss over. Stocks fall for a reason, and often very good reasons that should give investors pause for thought. Is that the case here?
Well, the fall began when the new government’s Budget was announced. The increase to NI contributions will hit a big employer like Greggs hard. With 32,000 employees, it has a larger workforce than the BBC or Royal Navy! Many of these employees will be on minimum wage too, meaning another increase in costs as a result of the Budget.
A buy?
The Budget was followed by a rough trading statement in January, which showed weak sales in Q4 2024 thanks to “more subdued high street footfall”. The shares dropped 26% in a couple of days. There has been a bit of a bounceback recently after a strong trading update showed like-for-like sales are getting back on track.
Is this enough for me to buy? No. The drop looks fully justified to me. I can hardly call the new share price a bargain. And, I think that with slowing revenues the dividend may come under threat in the future too. I wouldn’t call it a bad buy, by any means, but there are other opportunities out there that interest me more.
