Greggs (LON:GRG) Has Affirmed Its Dividend Of £0.19

Greggs plc (LON:GRG) has announced that it will pay a dividend of £0.19 per share on the 10th of October. This makes the dividend yield 4.4%, which will augment investor returns quite nicely.

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Greggs' Future Dividend Projections Appear Well Covered By Earnings

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Greggs' earnings easily covered the dividend, but free cash flows were negative. Since a dividend means the company is paying out cash to investors, this could prove to be a problem in the future.

Looking forward, earnings per share is forecast to fall by 2.8% over the next year. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 55%, which is comfortable for the company to continue in the future.

Check out our latest analysis for Greggs

Greggs' Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2016, the dividend has gone from £0.286 total annually to £0.69. This works out to be a compound annual growth rate (CAGR) of approximately 10% a year over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

The Dividend Looks Likely To Grow

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Greggs has seen EPS rising for the last five years, at 105% per annum. The company's earnings per share has grown rapidly in recent years, and it has a good balance between reinvesting and paying dividends to shareholders, so we think that Greggs could prove to be a strong dividend payer.

Our Thoughts On Greggs' Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Greggs' payments, as there could be some issues with sustaining them into the future. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come across 2 warning signs for Greggs you should be aware of, and 1 of them is significant. Is Greggs not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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