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A £10,000 investment in Greggs shares, based on the latest dividend forecasts, would generate a steadily growing stream of passive income over the next several years.
With the company expected to pay a dividend per share of 68.04p in 2025, 70.1p in 2026, and 74.02p in 2027, an investor holding around 513 shares (£10,000-worth) would receive annual dividend payments of about £349 in 2025, £359 in 2026, and £380 in 2027.
This is equal to a projected yield rising from around 3.55% to 3.86% over the period. In turn, this showcases Greggs’ commitment to increasing its payout in line with modest improvements in earnings.
Is it sustainable?
The company’s dividend coverage appears sustainable. The payout ratio’s forecasted to remain just above 50% throughout the period. This suggests that Greggs is maintaining a balance between rewarding shareholders and retaining earnings for future growth.
For income-focused investors, this level of coverage is reassuring, as it indicates that the dividend’s unlikely to be at risk, barring a significant downturn in trading conditions. In other words, earnings could halve and the company would still have enough to deliver its stated payout.
My concerns
However, the valuation of Greggs shares remains a sticking point for me. The forward price-to-earnings ratio’s projected at 14.2 times earnings for 2025, 13.8 for 2026, and 13.3 for 2027. While these multiples have fallen from previous highs, they still suggest the shares are expensive, relative to the company’s expected earnings growth.
For investors who prioritise value, these metrics may give pause. They tell us that there’s limited room for multiple expansion unless the company can deliver stronger-than-expected growth. The same occurs when I factor in the dividend yield.
It can’t keep expanding
The expanding dividend yield will undoubtedly attract many investors, especially in an environment where reliable income’s highly sought after. Greggs’ track record of dividend growth and its clear policy of distributing around half of its earnings will be a key draw for those seeking passive income.
However, there are legitimate concerns about the company’s longer-term growth prospects. The pace of store openings in recent years raises the possibility that Greggs is approaching saturation point in the UK market. It’s already mostly everywhere. This could limit the scope for further expansion-driven growth.
Additionally, the company’s core product range isn’t especially healthy. I find this a cause for concern as consumer preferences continue to shift towards healthier eating options, albeit slowly.
The bottom line
Personally, I think there are much better investment opportunities than Greggs, and I don’t think it’s worth considering. However, I appreciate that some investors think differently. They will likely be drawn to that increasing yield and a business they know and understand.
After all, many renowned investors tell us to invest in what we understand, and it’s a pretty simple business to get.
