As Brexit politics continue to dominate the headlines, I’d like to discuss the outlook for Greene King (LSE: GNK), the UK’s largest pub retailer and brewer, and Greggs (LSE: GRG), the leading bakery retailer.
Both shares have solid growth prospects and respectable dividends and therefore may deserve a place in a diversified portfolio.
Sound business
Greene King operates over 3,000 pubs throughout the UK. The brewer of Abbot Ale and Old Speckled Hen also owns restaurants, including Hungry Horse and Wacky Warehouse, as well as over 100 hotels and inns.
We are a nation that loves a pint and the local pub has always held an important role in our communities. Yet over the past few years, various cost pressures and shifting trends, such as reduced alcohol intake among younger adults, have affected the fortunes of UK-listed pub companies. The uncertainty over Brexit and decreasing consumer confidence have also added to the general sluggish outlook for the industry.
Mostly as a result of these challenging market conditions, GNK’s share price has plunged relentlessly over the last three years, from a near-978p peak in December 2015 to a low of 471p in March 2018.
However, the business may be starting to turn a corner and investors are once again beginning to pay attention to the company’s fundamental story. Year-to-date, the shares are up 20% and there may be room for further increase.
On 8 January, the alehouse operator released an upbeat festive season trading update as Christmas Day sales reached a record £7.7m. The group also reiterated its confidence in meeting its £245m full-year pre-tax profit guidance.
As the group’s portfolio consists of predominantly freehold or long-leased pubs, its estate is valued at £4.5bn, over twice the company’s market cap. Cash flow remains strong and has given the business “resilience during tougher market conditions.”
The shares currently trade at a P/E of 12, a number that should catch the attention of value investors. The dividend yield of 5.2% also makes Greene King a good pick for income.
Investor appetite on fire
On 7 March, Greggs released its 2018 preliminary results and cited a “very strong start to the year,” which was “supported by the launch of the vegan-friendly sausage roll” in January.
For the year, its total sales were up 7.2% to £1,029.3m. As part of the organic expansion of its network, in 2018, the retailer saw 99 net new shops openings and grew its estate to 1,953 shops. Earlier in January, the group also announced a 14% increase in sales for the first seven weeks of the new year
The share price since 2015 has reflected the strong demand for the baker’s sweet and savoury treats as it has gone from a low-500p level to over 1,811p in March. Meanwhile, the company’s dividend yield stands at 2%. Furthermore the group expects to declare a special dividend in July.
I believe that the rest of this decade could see new highs for the GRG share price thanks to the growth tailwind in the business and execution by management.
Nonetheless, there might be some profit-taking in the short term. The next few weeks may bring increased volatility to the stock market, and I would not advocate bottom picking. However, I find GRG shares to be a compelling buy candidate and I’d regard any potential dip in the price as an opportunity to grab the shares for the long term.