The Greggs (LSE: GRG) share price has taken a tumble over the past year, falling by almost a quarter. From a passive income perspective though, that could actually be a good thing.
After all, the baker is still pumping out dividends. Meanwhile, its falling share price has had the effect of pushing up the dividend yield.
A decade of dividends?
Right now, the Greggs dividend yield stands at 4.3%. So say someone invested £20k and sat back for a decade, at the current yield that could see them earn around £8,680 in dividends over the next 10 years.
Dividends are not the only way an investor can make money from shares. There is also the potential for capital gain. But shares can fall too, as Greggs’ 24% price decline over the past year painfully illustrates.
Still, selling for 11 times earnings, I reckon the current share price undervalues the company. I have bought Greggs’ shares that I hope will increase in value over coming years.
Payout growth potential
But let’s get back to the passive income potential of those dividends. Based on the dividend being flat, the £8,680 figure above is already substantial.
Right now, that might seem like a fair assumption at least for the short term, as last year’s interim dividend was held at the same level as the prior year’s.
What if the dividend starts to grow again though? The 2024 growth of 11% seems pretty ambitious over the long term. But 2023 saw dividend per share growth of 5%. I think that could be achievable over the coming decade if Greggs is able to use its economies of scale and proven business model to increase free cash flows substantially.
If the dividend per share grows at 5% annually over the coming decade, £20k invested today could potentially earn around £10,918 of passive income in 10 years.
No guarantees in life
Then again, growth and staying flat are not the only options for the dividend.
It could also be cut – or cancelled altogether. Such a scenario is not merely academic as Greggs suspended its dividend during the pandemic to preserve cash, as it recorded its first loss in well over three decades.
Right now, the company also faces uncertainty. That is why its share price has tumbled.
But, just as I think the share price fall has been overdone, I also feel optimistic about the long-term outlook for the dividend.
One source of uncertainty is slowing growth. Still, growth is growth and Greggs remains solidly profitable. Another risk is poor planning, as seen last year when the baker was caught on the hop in the sunny early summer because it had the wrong product assortment for the weather. Getting that wrong again is an ongoing risk.
Greggs has a lot going for it too though. At the end of the day, it is a fairly simple business and I think playing to its strengths is powerful. Those strengths include a huge shop network, large customer base and compelling value.
I plan to hang on to my shares in the anticipation of price gain – and hope to pick up passive income along the way too.
