Can Greggs' Rising Dividend Beat the FTSE?

LONDON -- The last few years have been tough for investors relying on the FTSE 100 (INDEX: ^FTSE  ) to deliver a rising dividend payout.

Looking at the iShares FTSE 100 ETF  (LSE: ISF.L  ) , an exchange-traded fund that tracks the benchmark index, we can see the aggregate payment from Britain's top 100 companies has yet to regain its prerecession peak:

 

2007

2008

2009

2010

2011

Dividend per Share (pence) 19.1 20.2 17.1 16.2 18.1

Still, there are companies out there that, despite the banking crash and gloomy economy, have managed to deliver a rising dividend throughout the last five years. One such name is Greggs (LSE: GRG.L  ) .

If you don't know, Greggs is a national bakery chain with cafe and bakery shops the length and breadth of Britain. It has enjoyed considerable success, expanding from just one premise in 1951 to 1,591 outlets today. With the shares at 493 pence, the market cap is 499 million pounds. This table summarizes Greggs' track record:

 

2007

2008

2009

2010

2011

Sales (millions of pounds) 586 628 658 662 701
Profits (millions of pounds) 36 34 34 38 45
Earnings per Share (pence) 34.04 33.5 34 37.3 39.5
Dividend per Share (pence) 14 14.9 16.6 18.2 19.3

As you can see, the dividend has increased by 38% during the last five years -- equivalent to an average 8.4% compound annual growth rate. Despite impressive expansion so far, Greggs continues an active program to increase its market share. In just the 19 weeks to May 12, for example, the company opened a net 20 new shops and is pushing into new marketing routes like the new "Greggs Moment" coffee shop format, motorway services shops, and a frozen-food offering in partnership with Iceland Foods.

But what really bakes my metaphorical cake about Greggs is the sheer simplicity of its business model: It puts repeat-purchase consumer food staples where, and when, its customers want them at a reasonable price. It's a simple-to-produce product that will never go out of fashion, in my view. What's more, the business is cash-generative and cash-flow positive in the sense that the company gets the cash before the customer consumes the product, and not the other way around.

Reliable flows of cash like that are just what's needed to sustain a progressive dividend policy.

Greggs' dividend growth score
I analyze three different features of a company to judge whether its dividend can continue to rise:

  1. Dividend cover: The last dividend was covered just more than twice by earnings. Score: 4/5
  2. Net cash/debt: The balance sheet is debt-free with around 19 million pounds in cash. Score: 5/5
  3. Outlook/recent trading: It's steady as she goes, according to the directors. Score: 4/5

Overall, Greggs scores 13 out of 15 for me, and I reckon the firm's dividend can continue to outpace the dividends from the FTSE 100.

Foolish takeaway
Although consumers are under pressure, there's little that gets in the way of a morning coffee and a bacon roll. Add to that Greggs' debt-free status, impeccable record of cash generation, and continuing program of expansion, and the outlook for the dividend is good in my view.

Right now, the forecast full-year earnings for Greggs are around 41 pence per share, which supports a possible income of about 4.2% for 2012. For such a reliable dividend-payer, that yield looks attractive to me.

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Further investment opportunities:

Kevin owns shares in Greggs. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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