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Until recently, Greggs‘ (LSE:GRG) shares probably weren’t on the radar of most income investors. A soaring share price kept the dividend yield pretty low, at about 2%.
However, Greggs has lost nearly half its value in just over a year. Consequently, the dividend yield’s spiked and income could play a much bigger part of any future returns from the stock.
Let’s take a closer look at the Greggs dividend to see if this FTSE 250 share might be worth thinking about for a portfolio.
Challenges
Firstly, why has Greggs stock tanked? Well, it’s due to a handful of issues. The main one is that sales growth has slowed dramatically.
In the first half of 2024, like-for-like (LFL) sales were up 7.4%, next to a £74.1m pre-tax profit (+16.3%). Fast forward to the first six months of this year, LFL sales were up just 2.6% in company-managed shops. Pre-tax profit fell 14.3% to £63.5m.
Management blamed “challenging market footfall” and weather disruption. Some investors fear that sluggish growth is linked to market oversaturation.
Higher labour costs placed on employers by the government haven’t helped, as this has forced Greggs to put up prices on some items, including sausage rolls. If firms are hammered again in next month’s Budget, then further price rises could threaten Greggs’ value proposition.
So there are plenty of risks and challenges facing the business right now. And this is reflected in quite a cheap valuation, with the shares trading at just 13 times next year’s earnings. That’s in line with the broader FTSE 250.
Passive income prospects
Turning to income, the stock’s expected to pay out 69p per share next year (FY26). This translates into a dividend yield of just over 4%.
So an investor putting £2,500 into the stock could expect to receive £100, plus Greggs’ forecast final dividend for FY25 of 50p per share. That would be about £160 in total, assuming these forecasts prove correct (which isn’t assured).
Is the stock worth a look?
As a semi-regular Greggs customer, I’d say its reputation as merely a sausage roll and pasty peddler is a bit unfair (and misleading). It now sells rice pots, salads, protein shakes, various sandwiches, and a very popular meal deal. The menu’s evolving as demand for high-protein options grows due to more folk on weight-loss drugs.
Meanwhile, its frozen Bake at Home range is now in 820 Tesco stores across the UK and online, as well as 930 Iceland stores. The initial launch of five products with Tesco could be expanded meaningfully in future.
Sticky inflation and a weak economy are obvious problems, as they are for all UK retailers right now. But my suspicion is that Greggs’ sales will prove more durable than some investors assume.
For the full year, the firm expects to open around 120 net new shops. Next year, it plans to relocate smaller existing shops to better locations.
On this subject, I was in a newish Greggs just off a motorway recently, and it was very spacious, with outdoor seating. The complete opposite of a poky Greggs bakery of yesteryear, with a queue stretching onto the street outside.
With the stock now trading quite cheaply, and a well-covered 4% dividend yield on offer, I think Greggs is worth weighing up.
