It’s no secret that Greggs (LSE:GRG) shares have taken quite a beating over the last year or so. Since September 2024, the UK’s most popular bakery chain has seen its market cap lose almost 50% of its value, dragging it down to a near five-year low.
But despite the challenges surrounding this business, dividends have continued to flow into the pockets of shareholders. As such, the yield offered by these FTSE shares today has reached its highest level in over a decade.
So, is Greggs now secretly a top-notch income stock? And how much passive income can an investor start earning if they invest their entire £20,000 ISA annual amount into this enterprise?
Passive income potential
At today’s share price, investing in Greggs unlocks a 4.3% dividend yield.
That means if someone were to buy £20,000 worth of Greggs shares, they would start earning an annual passive income of £860. And if the group continues to raise its payout, as it has done over the last three years, this income stream could steadily expand over time.
However, as every experienced investor knows, a dividend is only as healthy as the underlying company’s financials. So, can these payouts actually be sustained?
Looking at the numbers, the answer appears to be yes.
While wage inflation and higher raw ingredient prices have put pressure on profit margins, the drop in the stock price is primarily being driven by slower growth rather than deteriorating fundamentals.
As such, dividends remain well covered by earnings, reducing the risk of a potential payout cut, with some institutional analysts expecting modest dividend hikes over 2026 and 2027.
Needless to say, that’s an encouraging sign for income investors. And with this forecast backed by a relatively modest earnings multiple of 11.4, the risk-to-reward ratio seems to be quite favourable for long-term investors. However, it’s important to recognise that the risk is still far from zero.
What to watch
To offset the impact of inflation, Greggs has been raising the prices of its products. That’s helped protect margins, but it might also have damaged demand.
The bakery built its reputation on providing quality on-the-go food products at a low price. But after hiking prices by around 35% in the last five years, consumers seem to be challenging the ‘cheap’ aspect of the group’s reputation.
This could be an early indicator that Greggs is reaching its pricing power limits. And with another increase in the minimum wage coming in April this year, the company could be forced to ‘eat’ some of the added costs, adversely impacting margins.
The bottom line
With over 32,000 employees on its payroll, Greggs is highly sensitive to shifts in the UK minimum wage. But to management’s credit, the group is experimenting with self-serve kiosk solutions to lower its store staff requirements. And if successful, this initiative could help margins recover steadily over time.
Long-term dividend growth will be dependent on the group’s ability to protect margins in a world of rising costs. That obviously introduces execution risk. But with Greggs’ shares priced so cheaply, investors may want to consider investigating this income opportunity further.
