In its 2023 monetary yr, Greggs (LSE:GRG) generated £1.02 a share in passive revenue for its shareholders. That was a 73% enhance on the earlier yr and, if repeated in 2024, means the inventory is at the moment yielding 3.7%. That is primarily based on a share price as I write on Friday (28 June) of £27.78.

If this dividend was maintained for a interval of 20 years — and the revenue used to purchase extra shares within the firm — an preliminary funding of £19,974 (719 shares) would develop to £41,083. At that time, passive revenue of £126 a month may very well be earned. This assumes the share price stays unchanged all through the interval.

However Greggs doesn’t have a fame as an revenue inventory.

As an alternative, the corporate has bold plans for development and prefers to retain a few of its surplus money to reinvest within the enterprise.

This has helped its share price enhance almost 1.5 occasions since September 2020.

Another state of affairs

So what occurs if my hypothetical 719 shares grew by a modest 5% a yr and the corporate continued to pay a dividend of £1.02 a share for 20 years?

In these circumstances, my preliminary funding would develop to £82,284 inside 20 years. At that time, I may earn £255 a month in passive revenue.

However Greggs’ current monitor document is just a little erratic relating to dividends.

The corporate seeks to retain £50m-£60m of money on its stability sheet. Any surplus — after taking into consideration the capital expenditure necessities of the enterprise — is then returned to shareholders by the use of particular dividend.

For 2 of the previous three monetary years, it has supplemented its interim and ultimate payouts with a particular dividend of 40p.

It due to this fact doesn’t seem as if a return of £1.02 a share will be relied upon. After all, dividends are by no means assured. However it seems to me that Greggs’ particular payout is especially susceptible to being minimize.

Future prospects

And I believe the corporate’s share price is unlikely to develop as quickly because it has completed in current occasions.

That’s as a result of I feel its shares are already fairly costly.

Analysts predict earnings per share of 148.7p for the corporate’s 2024 monetary yr. This implies the inventory has a ahead price-to-earnings (P/E) ratio of 18.7.

It’s onerous to discover a firm that’s straight akin to Greggs. However for comparability, Domino’s Pizza Group has a P/E ratio of 11 and the FTSE 100’s a number of is at the moment round 10.5.

Nonetheless, the food-to-go retailer has a very good fame with shoppers. It was voted primary for worth within the YouGov BrandIndex 2023.

It additionally owns its provide chain. This provides it higher management over its enter prices and reduces its reliance on third-parties.

And the primary 19 weeks of 2024 have began effectively. Like-for-like gross sales development was 7.4%.

Nonetheless, regardless of these constructive causes to take a position, I feel there are higher worth alternatives for me elsewhere.

As an alternative of shopping for 719 Greggs shares I may buy different shares providing a extra beneficiant dividend. For instance, there are a number of members of the FTSE 100 at the moment providing yields in extra of 5%.

That’s why I don’t wish to take a place within the sausage roll and pie retailer.