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Greggs Shares Sweet, But PPI Weighs on Lloyds

The Week: Vegan sausage rolls have helped Greggs shares soar, but a recent correction in the share price could be a buying opportunity, says Morningstar columnist Rodney Hobson

Rodney Hobson 2 August, 2019 | 10:10AM

greggs

Shares in food retailer Greggs (GRG) have come off the boil after a tremendous run that took them from 950p just over a year ago to a recent peak of £24.76, but it is hardly surprising to see a correction after a more than doubling of the price. Shareholders, including me, can confidently expect the upward trend to resume.

Sweet Taste

Results for the 26 weeks to June 29 showed total sales up 14.7% to £546 million with like-for-like sales 10.5% better. Pre-tax profit margins improved from 5.4% in the previous first half to 7.5%. That is a tremendous performance given the general state of the High Street. Clearly Gregg’s 2,000 outlets are quite something.

Pre-tax profits improved from £24.1 million to £36.7 million despite a smaller gain from property disposals and a larger charge for restructuring. The ordinary dividend is raised 11.2% to 11.9p and the special dividend that was promised at the time of last year’s final results comes in at 35p.

Greggs had built up momentum in sales in the second half of 2018 and that spilled over into a broad-based performance in the current year so far. Apart from successful innovations such as the much vaunted vegan sausage roll, which has outstripped expectations, the stores benefited from high employment and rising wages that left more cash in the pockets of consumers, who coming through the doors in greater numbers.

Breakfast-on-the-go remains the fastest-growing element but Greggs is switching its attention to the latter part of the day, when staff can be underemployed. Pizzas and other hot food available after 4pm may lead to longer opening hours.

The 10% drop in the shares from the peak two weeks ago opens a buying opportunity that is likely to be shortlived. Existing shareholders should stay in, as I am doing.

Sour Taste

Lloyds Banking Group (LLOY) has joined a rather long list of companies in which I own shares that seem to fall disproportionately whenever results come out. The 3.2% drop on the second quarter report is a case in point.

Admittedly, the figures were not great. Pre-tax profits slipped 7% to £2.9 billion, against City expectations of £3.4 billion, but the underlying picture is not so bleak. The hole in the profits was caused by another £550 million being set aside to pay compensation in the PPI mis-selling scandal, taking the total to a massive £20 billion.

However, investors should bear in mind that the deadline for PPI claims, August 29, is looming. This has meant a flurry of late claims which could continue for another four weeks and spark one last further provision; it also means that a line is being drawn under this expensive scandal, which has hit Lloyds harder than its rivals.

Lloyds is the biggest retail bank in the UK and as such is probably the most exposed of the London-listed banks to the effects of Brexit. Finance chief George Culmer says there is as yet no sign that consumers are getting worried. Lloyds, he says, is geared up for no deal but he still expects some form of orderly withdrawal. If he is right, investor sentiment could turn sharply in favour of Lloyds later this year.

The shares are now down below 52p, which I think is ludicrously low. In my opinion they should be above 70p. As recently as April they were 66p.

The interim dividend is raised 5% to 1.12p. Assuming the total is raised 5%, as it was last year, the yield is an attractive 6.4%. I am already overweight in Lloyds shares and the rising dividends have been some consolation for the fact that the share price remains stubbornly unresponsive. Even so, I have been tempted to top up my holding.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Greggs PLC1,854.00 GBX0.16
Lloyds Banking Group PLC61.03 GBX0.35

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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