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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 progress 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 growth can’t go on perpetually.
Nonetheless, 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 enticing. 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 better look.
The worth proposition
The estimates counsel that Greggs’s earnings will fall round 10% in 2025. That’s actually not what shareholders will wish to hear. Basically the influence of the Price range mixed with decrease like-for-like gross sales progress means the corporate’s earnings trajectory isn’t persevering with in a linear format. Nonetheless, the forecasts present earnings recovering to close 2024 ranges by 2027. And through that interval, the dividend will proceed to develop.
| 12 months | 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 imagine Greggs is overvalued at 15.4 instances ahead earnings based mostly on its medium-term progress 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.
Nonetheless, 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 buyers could possibly tolerate.
Why contemplate an overpriced inventory?
Properly, as I’ve stated earlier than, Greggs isn’t for me. Nonetheless, I recognize different buyers have totally different priorities together with dividends.
So, what makes Greggs’s dividend attention-grabbing? Properly, it’s growing at a superb price. £10,000 invested in the present day would lead to £327 of dividend in 2025, adopted by £341 in 2026 and £363 in 2027.
It’s presently growing at round 5.5% per 12 months. And if this price 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 favor to spend money on corporations 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 issues concerning the longevity of ultra-processed meals in a rustic the place we’re slowly turning into extra conscious that our food plan impacts our well being.
