Greggs (LSE: GRG): tasty or not? The answer might be one thing for sausage rolls or yum yums (the clue’s in the name) – and quite another for the company’s shares.
A trading update last week seems to have brought a relief rally to the shares, up 12% over the past week.
But what has the longer-term picture been – and could this latest jump perhaps be the start of a long-awaited turnaround for the FTSE 250 share?
Six-month gain – and passive income prospects
Over the past six months, the Greggs share price has moved up 14%. So, yes, most of that growth comes from the past week. But it is growth nonetheless.
That is welcome, given the longer-term performance of Greggs shares: down 15% over one year and 32% over five.
The recent growth means that, whereas £5k invested in Greggs shares five years back would now have a paper value of £3,400, the same amount put in six months ago instead would have grown in value, to £5,700.
Plus there are dividends to consider. The current yield is 4.1%, already attractive in my view (indeed, I own Greggs shares partly for their passive income potential).
But someone buying at a lower share price six months ago would be earning a higher yield, close to 4.7%. On a £5k investment, that would work at around £235 of dividends per year.
So, what is going on?
Worries about growth and costs
Greggs shares have been pushed downwards over the past few years for a combination of reasons.
In terms of top line demand, there have been investor concerns that the company’s store-opening programme, when it already has thousands of shops, could eat into per-shop sales. Overexposure could hurt demand and so too might some consumer’s use of weight loss drugs.
Meanwhile, at the bottom line, costs such as National Insurance have grown – and the Middle Eastern conflict poses a risk the company’s energy bill will go up. For a baker, that is a significant cost.
Could this be the shape of things to come?
The recent trading update provided some reassurance for investors.
Total sales for the first 19 weeks of this year were up 8%. Some of that was driven by new shop openings, but even on a like-for-like basis the period saw company-managed shops grow sales by 3% year on year.
While the company does expect cost inflation across the full year of around 3% on a like-for-like basis, that was no worse than it had previously signalled. Indeed, the company has maintained its outlook for the full year.
That was enough to cheer investors.
Even after their strong run in the past few days, Greggs shares sell for 14 times earnings.
That is cheaper than it has been at times in the past, but Greggs now looks set to deliver the sort of revenues that shareholders could only dream of a decade or two ago.
From a long-term perspective, I think the share is worth considering – and plan to hang onto my own Greggs shares.
Christopher Ruane owns shares in Greggs.
