Greggs: The Undervalued UK Staple That's A Must-Have For Dividend Portfolios

In a market increasingly wary of economic volatility, Greggs plc (LON:GRG) emerges as a compelling contrarian play. With a dividend yield poised to surpass 4% by 2026, a disciplined expansion strategy, and a P/E ratio 50% below its five-year average, this UK food-to-go giant offers a rare blend of stability and growth. Let's dissect why long-term investors should consider this undervalued staple.

Dividend Resilience Amid Economic Uncertainty

Greggs' dividend track record is a testament to its operational strength. Over the past five years, the company has grown its ordinary dividend per share from 44.9p to 65.0p, excluding special distributions. This 45% increase reflects a dividend cover of 1.7x earnings, indicating payouts remain comfortably within earnings capacity even during inflationary pressures.

The dividend yield, currently 3.30%, is projected to rise to 4.19% by 2027 (assuming a £21.02 share price), making it a standout income play in a low-yield environment. What's more, Greggs has a history of returning surplus cash to shareholders via special dividends, including 40p per share in both 2022 and 2024. This underscores a shareholder-friendly capital allocation strategy that rewards long-term holders.

Operational Scalability: A 3,000-Store Vision

Greggs' expansion engine remains its most compelling growth lever. As of Q2 2025, the company operated 2,649 stores, up from 2,638 in early May, with plans to add 140-150 net new locations by year-end. This expansion isn't reckless—management prioritizes strategic relocations and high-margin Drive-Thru formats, ensuring new sites complement rather than cannibalize existing outlets.

The long-term goal of exceeding 3,000 UK stores is achievable given the £1.6bn addressable market for food-to-go. While concerns about saturation exist, Greggs' 95% store retention rate and ability to optimize underperforming sites suggest scalability remains intact.

Valuation: A Discounted Growth Story

At a P/E ratio of 13.71, Greggs trades at a 41% discount to its five-year average and a 50% discount to peer Whitbread plc (P/E 21.87). This compression isn't justified by fundamentals—sales rose 6.9% to £1.05bn in H1 2025, with 2.6% like-for-like growth in company-managed stores. The recent profit warning, driven by June's heatwave and refurbishment downtime, is a one-off headwind, not a structural issue. Analysts at Jefferies see the stock as undervalued at 12x earnings, with a £26.50 price target implying 26% upside.

Navigating Near-Term Risks

Critics point to footfall declines in hot weather and self-cannibalization risks as expansion accelerates. Yet Greggs' ability to raise prices by 2-3% annually without hurting demand (H1 average transaction value rose 0.3%) suggests pricing power. Meanwhile, operational efficiency initiatives, such as automation in kitchens, should mitigate labor cost pressures.

The special dividend in 2024 (40p) was funded by £35.5m in free cash flow, highlighting financial flexibility. This underscores management's balance between reinvestment and shareholder returns—a hallmark of value-oriented firms.

Conclusion: A Multi-Year Buy Signal

Greggs' combination of stable cash flows, disciplined expansion, and undervalued multiple positions it as a cornerstone holding for dividend-focused portfolios. While short-term volatility may persist, the 140-150 store target, 4.19% dividend yield by 2027, and 3,000-store vision form a compelling multi-year thesis.

For investors willing to look past near-term noise, Greggs offers asymmetric upside: a 13.7x P/E is a bargain for a company with 8%+ annual sales growth potential and a dividend yield set to outpace UK inflation.

Investment Advice:
- Buy: For investors with a 3-5 year horizon seeking income and capital appreciation.
- Hold: For those uncomfortable with short-term volatility.
- Avoid: Only if you believe UK consumer spending will collapse—a scenario requiring a far broader economic downturn than currently priced in.

In a market hungry for predictable returns, Greggs' combination of valuation discounts and dividend discipline makes it a rare gem in today's uncertain landscape.