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I struggled to see the attract of Greggs (LSE:GRG) shares because the inventory pushed upwards in 2024, peaking round August. It was buying and selling with the multiples of a know-how inventory, however working with the margins of a UK meals and beverage firm.
And whereas it delivered spectacular development within the post-pandemic years, a lot of this was enabled by steady retailer expansions. And let’s face it, Greggs is already omnipresent on our excessive streets, so this retailer enlargement can’t go on perpetually.
Nevertheless, the falling share value — down 28% over 12 months — has pushed the dividend yield proper up. Whereas it’s not above the index common, the present 3.3% ahead dividend yield is engaging. And that’s as a result of earnings and dividends are anticipated to proceed rising modestly all through the medium time period.
Let’s take a more in-depth look.
The worth proposition
The estimates recommend that Greggs’s earnings will fall round 10% in 2025. That’s actually not what shareholders will need to hear. Primarily the affect of the Funds mixed with decrease like-for-like gross sales development means the corporate’s earnings trajectory isn’t persevering with in a linear format. Nevertheless, the forecasts present earnings recovering to close 2024 ranges by 2027. And through that interval, the dividend will proceed to develop.
| Yr | EPS (GBP) | Dividend yield (%) | P/E ratio (x) | Web debt (£m) |
|---|---|---|---|---|
| 2024 | 1.496 | 2.50 | 18.4 | 289.8 |
| 2025* | 1.351 | 3.27 | 15.4 | 369.2 |
| 2026* | 1.394 | 3.41 | 14.9 | 376.3 |
| 2027* | 1.452 | 3.63 | 14.3 | 341.8 |
In brief, I consider Greggs is overvalued at 15.4 instances ahead earnings primarily based on its medium-term development prospects. The value-to-earnings-to-growth (PEG) ratio (kindly excluding the 2024 to 2025 drop) is round 3.5, indicating that the corporate is vastly overvalued.
Nevertheless, when adjusted for the dividend yield, this PEG ratio falls to beneath two. This nonetheless signifies an overvaluation, but it surely’s one thing savvy dividend traders might be able to tolerate.
Why contemplate an overpriced inventory?
Effectively, as I’ve stated earlier than, Greggs isn’t for me. Nevertheless, I respect different traders have totally different priorities together with dividends.
So, what makes Greggs’s dividend fascinating? Effectively, it’s growing at an excellent charge. £10,000 invested at present would end in £327 of dividend in 2025, adopted by £341 in 2026 and £363 in 2027.
It’s at the moment growing at round 5.5% per yr. And if this charge is sustainable, in a decade, an investor can be taking £595 yearly from their preliminary funding.
Nonetheless not for me
Even with the growing dividend, Greggs simply isn’t for me. The valuation metrics don’t add up. Usually, I desire to put money into firms the place the PEG ratio falls beneath one or is considerably beneath the index common. Greggs doesn’t provide that. What’s extra, I do have considerations concerning the longevity of ultra-processed meals in a rustic the place we’re slowly turning into extra conscious that our food regimen impacts our well being.
