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The UK market is packed with high-yielding dividend stocks that make excellent options for passive income. Many pay a yield above the average 3.5%. But growth is also important when considering stocks for an income portfolio.
One of my favorites FTSE 250 Index stocks are Greggs (LSE: GRG). The popular high street bakery chain has been an impressive performer since 2014. It is up 434% over the past 10 years and has outperformed the wider UK market.
But past performance is no indication of future results. So how much would a £10,000 investment today earn me in the future?
Let's take a look.
A solid foundation
There's no doubt that Greggs is a much-loved and well-established British brand. It's the go-to pie and sandwich shop for many hungry workers when lunchtime rolls around. According to Statista, it was the most popular food brand in the UK in the first quarter of 2024, beating out American rivals such as Burger King and McDonald's.
It is also one of the most prolific. Since 2006, the number of Greggs stores in the UK has almost doubled. It now has almost 2,500 stores on high streets, stations and airports across the country.
With a market capitalisation of £3.25bn and £1.8bn of revenue last year, it is fair to say that the company has a solid foundation for future growth. However, its H1 2024 results revealed a slowdown. At £55.1m, net profit was down 8.6% on H1 2023 and earnings per share (EPS) declined from 59p to 54p.
Valuation and forecasts
Looking at a variety of metrics, the stock price could be overvalued. It's 43% above fair value based on future cash flow estimates, and the price-to-book (P/B) ratio shows the stock is 6.5 times the company's book value. That's not uncommon for popular stocks, but it could limit near-term growth. It may need to post increasingly better results to attract more buyers at this level.
Analysts expect revenue to rise 22% over the next two years and earnings to grow by around 13%. The average 12-month target price is just over £33, a 4.3% increase on the current price.
Dividends
As for dividends, Greggs had a good track record before the pandemic. Payments rose between 2000 and 2018, with only a brief pause in 2013. They were cut in 2019 and reduced for a year in 2020. However, they came back strongly in 2021, almost doubling the 2018 payout.
Still, at 2%, the yield is low and won't add much value. You'd pay just £20 a year for a £10,000 investment. However, assuming an average annual price growth of 5% and reinvested dividends, the capital could grow over time.
At that rate, it could double to £20,000 after 10 years and pay dividends of £370 a month. That's not a lot, but it's more than a typical savings account could achieve.
Final thoughts
I think Greggs is a solid, reliable value stock, but it doesn't generate a lot of passive income. I'm concerned that it has exhausted its market in the UK. I think it has potential to expand in Europe, but may struggle to gain a foothold in the US.
I like my Greggs shares and am a regular customer so I plan to hold on to them. But I won't be buying any more. I am worried about how they will grow in the future.
I trust you have a plan.
