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In its 2023 monetary yr, Greggs (LSE:GRG) generated £1.02 a share in passive revenue for its shareholders. That was a 73% improve on the earlier yr and, if repeated in 2024, means the inventory is at present yielding 3.7%. That is primarily based on a share worth as I write on Friday (28 June) of £27.78.
If this dividend was maintained for a interval of 20 years — and the revenue used to purchase extra shares within the firm — an preliminary funding of £19,974 (719 shares) would develop to £41,083. At that time, passive revenue of £126 a month could possibly be earned. This assumes the share worth stays unchanged all through the interval.
However Greggs doesn’t have a fame as an revenue inventory.
As a substitute, the corporate has bold plans for progress and prefers to retain a few of its surplus money to reinvest within the enterprise.
This has helped its share worth improve practically 1.5 occasions since September 2020.
An alternate situation
So what occurs if my hypothetical 719 shares grew by a modest 5% a yr and the corporate continued to pay a dividend of £1.02 a share for 20 years?
In these circumstances, my preliminary funding would develop to £82,284 inside twenty years. At that time, I might earn £255 a month in passive revenue.
However Greggs’ latest monitor report is a bit of erratic relating to dividends.
The corporate seeks to retain £50m-£60m of money on its steadiness sheet. Any surplus — after making an allowance for the capital expenditure necessities of the enterprise — is then returned to shareholders by the use of particular dividend.
For 2 of the previous three monetary years, it has supplemented its interim and remaining payouts with a particular dividend of 40p.
It due to this fact doesn’t seem as if a return of £1.02 a share might be relied upon. After all, dividends are by no means assured. Nevertheless it seems to me that Greggs’ particular payout is especially weak to being reduce.
| Dividend | FY21 (pence) | FY22 (pence) | FY23 (pence) |
|---|---|---|---|
| Interim | 15 | 15 | 16 |
| Last | 42 | 44 | 46 |
| Particular | 40 | – | 40 |
| Whole | 97 | 59 | 102 |
Future prospects
And I think the corporate’s share worth is unlikely to develop as quickly because it has finished in latest occasions.
That’s as a result of I believe its shares are already fairly costly.
Analysts expect earnings per share of 148.7p for the corporate’s 2024 monetary yr. This implies the inventory has a ahead price-to-earnings (P/E) ratio of 18.7.
It’s arduous to discover a firm that’s instantly corresponding to Greggs. However for comparability, Domino’s Pizza Group has a P/E ratio of 11 and the FTSE 100’s a number of is at present round 10.5.
Nevertheless, the food-to-go retailer has a superb fame with shoppers. It was voted primary for worth within the YouGov BrandIndex 2023.
It additionally owns its provide chain. This offers it larger management over its enter prices and reduces its reliance on third-parties.
And the primary 19 weeks of 2024 have began effectively. Like-for-like gross sales progress was 7.4%.
Nevertheless, regardless of these optimistic causes to take a position, I believe there are higher worth alternatives for me elsewhere.
As a substitute of shopping for 719 Greggs shares I might buy different shares providing a extra beneficiant dividend. For instance, there are a number of members of the FTSE 100 at present providing yields in extra of 5%.
That’s why I don’t need to take a place within the sausage roll and pie retailer.
