Greggs (LSE: GRG) shares are up 6% year to date, slightly above the FTSE 250‘s return of 3.4%. This continues their trend of outperforming the mid-cap index over many years.
While the high street baker also pays a dividend, the ordinary yield of 2.2% is below the FTSE 250 average (3.3%). However, the stock does tend to reward shareholders with special dividends too.
So, how much would I need to fork out to aim for £1,000 in passive income across the next two years? And would I buy more Greggs shares today? Let’s dig in.
Passive income
Brokers currently forecast 68.2p per share for the current financial year and 75.5p per share for next year. If they turn out to be correct, it means I’d need 700 shares to aim for £1,000 in dividend income over this period.
Based on today’s share price of 2,756p (£27.56), these would set me back around £19,292. That’s not chump change, at least not for me, meaning I’d personally rather spread such a sum around a handful of stocks.
However, Greggs also has a policy of returning surplus cash to shareholders in the form of special dividends. For FY23, it paid an extra 40p per share (received in May with the final dividend).
If it did so again in FY24 and FY25, that would raise the two-year payout from 700 shares to above £1,500.
This isn’t guaranteed though, especially as the firm is ramping up its capital expenditure to £250m-£280m this year (from £200m) to drive growth in the business. Ultimately, no payouts are set in stone.
Peak Greggs?
Last year, sales rose by almost 20% to £1.8bn while it delivered record profits of £188m (up 27%). And having recently reached 2,500 locations, it is now on track to expand its network to 3,000 shops.
Some investors thought we’d have long reached ‘peak Greggs’ by 2024. However, the firm keeps finding ways to grow sales. Here are some:
- Opening for longer in the evening
- Driving increased loyalty through the app
- Delivering food on Uber Eats as well as Just Eat
- Expanding partnerships with retailers including Primark, Tesco, and Sainsbury’s
- Increasing franchise partnerships, especially in forecourts
In 2023, it even overtook McDonald’s to become the UK’s most popular breakfast destination.
Skinny jabs
In the first 19 weeks of 2024, like-for-like sales growth was 7.4%. So the Greggs growth story rolls on.
However, one risk I’m keeping an eye on here is GLP-1 weight-loss drugs (nicknamed ‘skinny jabs’). These are known to work by reducing appetite and can lead to fewer cravings for snacks and baked goods.
There are millions of overweight people in the UK that could end up on these drugs over the next few years. If management starts mentioning the dreaded ‘W’ words — ‘weight-loss drugs’ or specifically ‘Wegovy‘ (Novo Nordisk‘s blockbuster GLP-1 drug) — the stock could get hammered.
Speaking as a shareholder, I’m reassured that Greggs is already adapting by offering healthier menu options. For example, it recently won a healthy eating award for its sweet potato bhaji and rice salad bowl.
The stock is trading at around 19 times forward earnings. I think that’s fair value, so I’d consider adding Greggs shares to my portfolio today if I didn’t already own them.
This post was originally published on Motley Fool
