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With Greggs on a roll, is this FTSE 250 dividend stock too hot to ignore?

In a five-year transformation from bargain basement bakery to food-on-the-go chain, Greggs (LSE:GRG) has been very successful in taking over the high end of the low end.

Like-for-like sales growth has remained consistent since 2013, with chief executive Roger Whiteside willing to branch out and innovate. Dividend yields are respectable, hovering around 3%, while the share price is up over 300% in the last half-decade.

And the brand has clearly evolved. 

It’s no longer just office workers barging into the fray and mums with prams huddling for a pepperoni slice or a steak bake.

Greggs has widened its products on offer to include salads and vegan sausage rolls, and cleaned up its image with a healthier atmosphere featuring open, airy storefronts and cafe-style seating.

The stock is trading at 2,282p at the time of writing, up over 116% for the year.

I would argue, unlike my Foolish colleague Paul, that the underlying business makes Greggs a strong buy even at this price. 

Changing tastes

On the one hand, analysts would have you believe that Britain’s high streets are suffering from terminal decline. 

Bank branches have fallen out of fashion in favour of apps, the shift to online shopping has crucified profits and once-great stalwarts are dropping left, right and centre. 

On the other hand, it’s easy to point to profitable businesses that were saddled with incredible levels of debt. 

It happened to Maplin. That went to the wall after years of operating profits falling into the red. Toys R Us (deceased 2018) went through a leveraged buyout in 2005 which added $5.3bn of debt to its balance sheet. Latterly it suffered from a huge estate of vast, impersonal stores, paying business rates it could not support.

Greggs, by contrast, reported another set of stellar results this week despite being on the same high street that is apparently killing off its rivals.

Interim results for 2019 saw underlying pre-tax profits shoot up from £25.7m to £40.6m and like-for-like sales trend 10.5% higher. 

It also announced a special dividend of 35p with its cash position at £85.9m, compared to £43.5m for the first half of 2018.

This is no flash in the pan.

A Q4 2018 trading update showed a very strong end to the year with sales up 7.2%, while earnings per share growth hit double digits for the first time since 2016. Store openings again beat closures by a ratio of almost three-to-one.

Competition in this sector has weakened considerably as Greggs has shifted its aspirations higher.

The likes of Martins and Poundbakery are still wallowing in the pile-’em-high end of the market, while much of the rest of the debt-saddled opposition have helpfully taken themselves out of the equation by going into administration. 

Breggsit

The falling pound is a concern. A two-year low against the dollar this week is not to be taken lightly.

Almost every sector will be hurt in the short-term if the UK goes out of Europe on 31 October without a deal, promises of vast domestic investment from our new PM notwithstanding.

But a weak sterling is likely to draw in foreign investors looking for bargain stocks. 

And there Greggs will be, with its exceptional sales, outperforming stores and a share price to match.

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Tom holds no position in Greggs. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.