Would shares in Greggs be a decent buy in these markets? Here’s what I think

I reckon Greggs (LON: GRG) is a great growth and dividend stock, powered by strong cash flow. Here’s what I’d do now.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The story behind the bakery chain and food-on-the-go retailer Greggs (LSE: GRG) is one of robust expansion driving prodigious cash flow and escalating shareholder dividends.

And in the savage markets we saw last week, the stock held up pretty well. Its decline between 21 February and 2 March was around 15%. That’s nowhere near as grim as the reversals we’ve seen with airline shares, for example.

The outlook

I reckon Greggs’ business is far more defensive than out-and-out cyclical firms, such as those in the travel sector. It seems to me that people will prioritise spending on a daily caffeine fix and a sticky bun over just about anything else! And that kind of habit will likely be slow to decline even in tougher general economic times.

But before we all start stabbing the ‘buy’ button for Greggs’ shares, let’s look at what chairman Ian Durant said about the outlook in today’s full-year results report. And he kicks off by mentioning the tough conditions in the UK retail sector and “uncertainties” because of the potential for the COVID-19 coronavirus outbreak to affect the global economy.

However, Greggs made a strong start to 2020, he said. The company had a good January but saw a “significant” slowdown in February, due to storms.  But Durrant reckons the firm has invested in infrastructure to compete in the growing UK food-on-the-go market and he sees “great opportunities ahead as we embrace new channels that will extend our reach.”

I reckon the company is coping well with weaker conditions in the retail sector and the firm’s expansion into out-of-town locations has probably helped that. But COVID-19 is the wild card, and anything could happen from where we are today.

Indeed, the virus has the potential to mess up Greggs forward trading figures along with those of many other firms – at least over the shorter term.

Good trading figures

Today’s full-year figures are stonking. Sales rose by 13.5% compared to the prior year, with like-for-like sales from company-managed outlets rising 9.2%.

It seems clear the company’s offering is appealing to customers. And that’s showing in earning too, with pre-tax profit, excluding exceptional items, shooting up by just over 27%.

But it’s worth noting the figures reflect the adoption of IFRS16 (lease accounting) “and are not directly comparable” with 2018’s figures, which have not been restated.

Nevertheless, the directors expressed confidence by slapping almost 26% on the total ordinary dividend for the year and said they’ll consider the possibility of a special dividend at the time of the interim results. There was an earlier special dividend of 35p per share in October 2019.

The pace of growth is impressive. There were 97 net shop openings in the period, pushing the total number of outlets up to 2,050. And initiatives such as the roll-out of a delivery service in partnership with Just Eat look set to drive further progress in the years ahead.

I like Greggs, but the shares aren’t cheap. With the price near 2,174p, the forward-looking earnings multiple for 2020 sits just over 23, and the anticipated dividend yield is about 2.4%.

I’m watching, but will likely tough it out and pounce later if the price falls further.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share mentioned. 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.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »