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

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.

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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.

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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.