Back in 2012 I bought a few shares in Greggs for 485p. To me it looked like a solid, relatively defensive company with a good track record of dividend growth and an attractive near-5% dividend yield.
Fast forward to late 2014 and I decided to sell my shares in Greggs at 599p, largely because the shares were no longer obviously cheap. I’d made almost 30% in two years and I wanted to invest in other companies that were trading at more attractive prices.
But of course the market is a funny thing and what one person thinks is expensive (599p) another thinks is cheap. As I got out, Greggs’ share price increase sucked in the “momentum” crowd, those investors who buy whatever’s going up, and they continued to drive the price up and up and up.
Today the shares stand at almost 1,200p, twice the price I thought was about fair value. At today’s level the company’s shares have:
- Dividend yield = 2% (FTSE 100 = 3.4%)
- PE10 (share price to 10 year average earnings) = 31 (FTSE 100 = 16.3)
- PD10 (share price to 10 year average dividend) = 63.3 (FTSE 100 = 34.6)
In every way the shares are more expensive than average, implying that investors think Greggs is substantially better than the average company. In fact those multiples assume that Greggs is in the same league as Sky, Reckitt Benckiser, Next and other companies that have been extremely successful over prolonged periods of time.
I’m not remotely convinced that’s right. I think Greggs’ share price could have a long way to fall if the company even slightly disappoints the market.
You can read my full review of Greggs and its current lofty valuation on the BullBearings.co.uk website.