Greggs (LSE: GRG) shares have been marching steadily higher for many years now. In fact, across the last five years they’ve outperformed shares of US giants McDonalds, Coca-Cola and PepsiCo.
Not bad for a bakery chain serving food in the UK!
But how much would I have today if I’d invested £10,000 in this FTSE 250 stock five years ago? Let’s take a look.
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A tasty return
In late January 2019, the share price was 1,559p (or £15.59). Today, it’s at 2,676p, which translates into a solid 71.5% gain.
It means my £10,000 investment would now be worth about £17,150.
But that’s not all, because most profitable firms pay their shareholders dividends too, and Greggs is no exception. Barring the Covid-hit year of 2020, it’s dished them out regularly.
Ten grand would have bagged me 641 shares half a decade ago. And these would have paid me another £1,564, bringing my total return to £18,714.
If City analysts are correct in their dividend forecast for FY24, I’d be due another £439 in dividends.
The takeaway here is that a smart investment can be like a gift that keeps on giving.
What’s the secret sauce?
To my mind, there are a few reasons for Greggs’ ongoing success.
It’s well-run and appears to have a great corporate culture. For example, the firm shares 10% of its annual profits among its staff. Its balance sheet is also in fantastic shape, which suggests responsible stewardship of the firm.
Crucially, the company has managed to keep growing profitably, both organically and through expansion of its store estate. In 2019, net profit was £87m on revenue of £1.1bn. Last year, bottom-line profit is forecast to have reached £127m on revenue of £1.8bn.
That’s a 7%-8% net profit margin, which is actually very good for the industry.
Meanwhile, the firm’s return on capital employed (ROCE) is 21%. This profitability metric measures how effectively a company uses its total capital employed to generate income. This strong ROCE demonstrates that the company is generating good returns on the capital invested, which is attractive to investors.
Finally, the dividend has increased substantially, from 16.9p per share in 2010 to 62.3p today.
Still a buy?
It’s only natural to wonder whether it’s worth buying a stock after it’s risen for years. I do think it is in this case.
In fact, I did so myself in October, despite an above-average price-to-earnings (P/E) ratio of 20 that adds potential valuation risk. I’m also mindful that a return of inflation on energy and food could increase input costs, threatening the firm’s profit margins.
Looking forward, though, I’m attracted to Greggs’ growth strategy. It intends to open 150 new shops every year to add to its existing total of 2,473. Plus, a new delivery partnership with Uber Eats is under way, complementing its existing presence on Just Eat.
Meanwhile, recently introduced evening trade (post 4pm) represented 8.8% of company-managed shop sales during the third quarter. And new 24-hour drive-throughs are being trialled, which could boost sales.
Overseas growth is also back on the menu, meaning we could see travellers munching Greggs sausage rolls in international airports one day. It wouldn’t surprise me and I’d probably be one of them.
If I didn’t hold the stock, I’d invest in it today.
