Are Greggs shares the best buy on the FTSE 250?

After Greggs shares posted an awesome performance, this Fool is looking at them closely. However, he’s not keen on them today.

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Looking back over the last 10 years, Greggs (LSE: GRG) shares have been a standout performer on the FTSE 250. From a single shop, the baker has become a high street staple. In the last decade, its share price has climbed by over 490%.

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This year the retailer has kept up that strong performance, rising by 19.4% year to date. For comparison, the FTSE 250 is up 6.7% across the same period.

I think the FTSE 250 is full to the brim with quality. But, on paper, given its growth, there’s certainly a case to be made that Greggs could be one of the best shares to buy on the index. Is it time I bought some shares in the sausage roll maker for my portfolio? Let’s take a look.

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Extra cash on offer

As an investor who targets income, I want to start by delving deeper into the passive income Greggs provides.

Currently, the stock yields a modest 2.1%. That’s below the FTSE 250 average of 3.3%. So, it may not look like the most enticing payout.

But I’m optimistic that it could rise in the times to come. It has been on the up in years gone by and the firm seems keen to keep rewarding shareholders. For example, Greggs lifted its interim payout by 3p to 19p per share. That’s an 18.8% jump from last year.

Major growth

With the growth the business has gone through in recent times, it’s not surprising that it’s willing to distribute more cash to shareholders. Even despite the cost-of-living crisis, Greggs seems to be going from strength to strength.

In all fairness, there’s the argument to be made that during times like now, when consumers’ pockets are squeezed, Greggs is in a prime position to benefit. It’s results certainly pay homage to that idea.

For the first half of the year, sales rose by nearly 14% to just shy of £1bn. On top of that, profit before tax also rose to £74.1m, or 16% higher than the year prior.

During the period, Greggs also opened 99 new stores. The firm said it’s now on track to open 140-160 new stores in 2024. It also continues to invest in its supply chain, which will support its next phase of expansion plans.

My issues

So, it seems the business has no plans of slowing down. But I have one concern with the stock. That’s its valuation.

Greggs currently trades on a price-to-earnings (P/E) ratio of 23.3. The FTSE 250 average is around 12. In my eyes, Greggs looks expensive.

Furthermore, looking ahead doesn’t paint a much brighter picture. Greggs trades on a forward P/E of 21.6. Again, that looks like it could be too expensive.

Aside from its valuation, I have other concerns too. There’s no denying Greggs is extremely popular due to its cheap pricing and convenience. However, I’m concerned that consumers nowadays are more conscious than ever about what sort of food they put in their body. And I’d only imagine this to intensify in the decades to come. Greggs’ ultra-processed food may taste nice, but it doesn’t exactly align with a healthy lifestyle.

For that reason, as well as its valuation, I’m steering clear of Greggs for now. I see better options out there on the FTSE 250.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Greggs Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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