A lot of people think pastries, cakes, and other items from Greggs (LSE: GRG) are tasty. Owning Greggs shares has not been so tasty lately, though. The share price has fallen 8% in the past year alone – and 41% over five years.
But share price gains or falls are only one element of the total return a share may deliver. Dividends can also play a role.
So, how does Greggs look on that score?
Above-average dividend yield
At the moment, Greggs shares offer a dividend yield of 4.3%.
That is markedly higher than the 3.4% yield offered by the wider FTSE 250 index (of which Greggs is a member).
Last year saw the ordinary dividend held flat and, unlike the prior year, there was no special dividend. At 69p per share for the full year, the current ordinary dividend amounts to £690 per year for someone who owns 1,000 shares.
Currently the Greggs share price is around £15.95, so buying 1,000 would cost close to £16,000.
I’m not expecting a dividend rise this year
What about the coming years?
After the board kept the dividend flat last year, I think they may decide that is also a prudent move for the current year.
We should find out next Wednesday (29 July), when the baker is due to release its interim results.
In a trading statement a couple of months ago, the company maintained its outlook for the full year. That includes ongoing guidance that it expects to deliver profits at a similar underlying level to last year. Last year, underlying profit before tax fell 9% year on year despite revenues growing 7%.
That does not bode well for the prospect of a dividend increase.
No dividend is ever guaranteed
Could there be a cut?
It is always a possibility. Greggs has warned about the impact on this year’s numbers of paying for a new distribution centre in Derby.
But I would be surprised to see a cut. Greggs is profitable and cash generative. Given the share price fall in recent years, any cut could lead to weaker investor confidence, risking pushing the share price even lower.
So, I expect the board will be keen at least to maintain the payout at its current level.
I’ve invested, but not just for the dividend
I own Greggs shares and have no plans to sell them.
While I own them, that index-beating dividend is providing me with some welcome dividend streams.
But that is not the main reason I bought them or continue to hold them. My main interest in Greggs shares is the opportunity for capital gains given that revenues keep growing but the share price has seen the big drop I mentioned above.
That fall had reasons. Inflation risks eating into profit margins and the company’s demand planning has been poor as we saw last summer when it led to a profit warning. The huge number of existing shops could lead to consumers getting fatigued with the brand.
But Greggs has a proven business model, compelling value proposition for hungry, budget-conscious customers, and a powerful brand.
I see the current share price as undervalued and plan to hang onto my shares.
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Christopher Ruane owns shares in Greggs.
