Company Review: Greggs Plc

The vast majority of student interaction with this ready- to-eat food retailer is probably limited to passing by a local store in your hometown or Leamington, or perhaps it’s revelling in the news that there’s to be a new Greggs opening in Cannon Park. We were all rooting for Aaron Bowater’s campaign to bring one to campus, that’s for sure. Have you ever stopped to look beyond the shop premises though? If you haven’t then it might just be worth your while…

Greggs had a humble beginning as a bakery in Newcastle, and when the founder’s son took over in 1964 he expanded the business by acquiring other chains of bakeries around the country. Then in 1984 a new Managing Director took over and Greggs went public in its IPO. £1.35 was the price per share. If you factor in the 10-for-1 stock split that occurred in 2009 (Greggs reissued 10 shares for every 1 share investors owned in order to reduce the share price and encourage investors) then Greggs has given investors a 12.8% p.a. return on share price alone. That’s ignoring all the dividends it’s paid out over the years since 1985.

So what is the Greggs business model? It makes tasty treats and people buy them. Simple. To borrow Warren Buffett’s brain for a bit, Greggs appears to be the kind of boring stable business that interests him. It sells sandwiches and cakes, treats and coffee. People always need to eat. The Internet hasn’t changed the way in which people eat, or buy sandwiches. Perhaps if Amazon starts offering an Amazon Prime sandwich delivery service via drones things will get shaken up, but until then…

It has zero debt, its customers (you and I!) pay in cash straight away and management are sensible. How do you know this? Well, the CEO and other directors received a 2% pay rise as did all the other employees. If management run around receiving outrageous payrises then it can create a culture of discontent. If management demonstrate common sense and go without largesse then it creates a great feeling within a company.

So, what about this free lunch then? Greggs pays a great dividend. Currently it’s around 3.9% so if you were to invest £100 in Greggs shares then after 12 months you’d be paid £3.90 as a dividend. For free! That’s certainly enough for a sandwich from their range. In 12 months you can also assume that your £100 is now worth £112.80 (remember that 12.8% p.a. increase in share price?). Now obviously Greggs doesn’t do 12.8% per year exactly, but over the long run you can probably assume something roughly equivalent. Incidentally, your £112.80 of Greggs shares will then pay you £4.40 as a dividend; 50 pence more than last year.

I’m arguing that there’s less speculation with Greggs relative to a company such as Glaxo-Smith Kline; GSK needs large quantities of cash spent on research and development. This gets recorded in their financial reports but there is some potential for dodgy accounting here and the results are less tangible. The only potentially dodgy thing in Greggs’ financial reports is the £1.3m of overdue payments from 2012, but I’m keeping a close eye on that number.