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I struggled to see the allure of Greggs (LSE:GRG) shares as the stock pushed upwards in 2024, peaking around August. It was trading with the multiples of a technology stock, but operating with the margins of a UK food and beverage company.
And while it delivered impressive growth in the post-pandemic years, much of this was enabled by continuous store expansions. And let’s face it, Greggs is already omnipresent on our high streets, so this store expansion can’t go on forever.
However, the falling share price — down 28% over 12 months — has pushed the dividend yield right up. While it’s not above the index average, the current 3.3% forward dividend yield is attractive. And that’s because earnings and dividends are expected to continue growing modestly throughout the medium term.
Let’s take a closer look.
The value proposition
The estimates suggest that Greggs’s earnings will fall around 10% in 2025. That’s really not what shareholders will want to hear. Essentially the impact of the Budget combined with lower like-for-like sales growth means the company’s earnings trajectory isn’t continuing in a linear format. However, the forecasts show earnings recovering to near 2024 levels by 2027. And during that period, the dividend will continue to grow.
| Year | EPS (GBP) | Dividend yield (%) | P/E ratio (x) | Net 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 short, I believe Greggs is overvalued at 15.4 times forward earnings based on its medium-term growth prospects. The price-to-earnings-to-growth (PEG) ratio (kindly excluding the 2024 to 2025 drop) is around 3.5, indicating that the company is vastly overvalued.
However, when adjusted for the dividend yield, this PEG ratio falls to below two. This still indicates an overvaluation, but it’s something savvy dividend investors may be able to tolerate.
Why consider an overpriced stock?
Well, as I’ve said before, Greggs isn’t for me. However, I appreciate other investors have different priorities including dividends.
So, what makes Greggs’s dividend interesting? Well, it’s increasing at a good rate. £10,000 invested today would result in £327 of dividend in 2025, followed by £341 in 2026 and £363 in 2027.
It’s currently increasing at around 5.5% per year. And if this rate is sustainable, in a decade, an investor would be taking £595 annually from their initial investment.
Still not for me
Even with the increasing dividend, Greggs just isn’t for me. The valuation metrics don’t add up. Typically, I prefer to invest in companies where the PEG ratio falls below one or is significantly below the index average. Greggs doesn’t offer that. What’s more, I do have concerns about the longevity of ultra-processed foods in a country where we’re slowly becoming more aware that our diet impacts our health.
