As with most dividend-paying stocks, cash rewards are included Greggs (LSE:GRG) fell following the Covid-19 outbreak. In this case, dividends were suspended for the financial year ending January 2021 following the closure of stores due to store closures.

But FTSE250 the bread retailer revamped its dividend policy after the pandemic. Annual payouts have increased by percentages in the low to mid-single digits. Greggs also paid a special dividend to investors last year.

City analysts expect dividend growth to accelerate over the next few years as well:

As we’ve seen during the pandemic, dividends are never guaranteed. So I have to consider how realistic these predictions are.

On this basis – and based on Greggs’ share price forecasts – should I buy the superstar bakery for my portfolio?

Strong predictions

The first and simplest thing to consider is how well the projected dividends line up with the expected profits.

Greggs is expected to grow profits by 7-8% in each of the next three years. So it’s nice that dividend coverage was recorded twice during this period. A reading of 2x or higher provides a decent cushion in case earnings are unsatisfactory.

The next thing to pay attention to is the strength of the company’s balance sheet. Greggs also scores high on this front.

The company has no debt and ended the first half of 2024 with a cash balance of £141.5 million. This encouraged the company to raise its interim dividend by almost 19% year-on-year to 19p per share.

However, Greggs warned it expected a cash squeeze as it continued its store expansion program and investment in manufacturing and distribution.

Hard fall

Overall, Greggs looks to be in great shape to meet current dividend forecasts, in my opinion. But does this make the company a good investment?

After all, the company’s stock price has plummeted since its third-quarter earnings call on Oct. 1. They showed that comparable sales growth dropped to 5%. Incomes could also fall further if inflationary pressures reduce consumer spending.

But overall, I think Greggs shares are an attractive buy right now. I actually just bought it with my own personal pension (SIPP).

The best dip

In my opinion, the market overreacted to the news of slowdown in sales. Following the price decline, Greggs’ price-to-earnings (P/E) ratio fell below 20 times to 19.8 times.

I think this valuation is more than fair for a stock of this caliber. Past performance is no guarantee of future returns, but the company’s share price is up 340% since 2014 as continued expansion delivers huge profits.

Combined with dividends, the total return over the period approaches 500%.

In my opinion, there are good reasons to expect a rebound in the Greggs share price. Ambitious expansion continues, with the company building capacity for 3,500 stores, up from 2,560 currently. This includes building stores in tourist locations and increasing the number of franchise outlets.

What’s more, the retailer’s drive to streamline delivery and click-and-collect services is paying off. He plans an evening attack on the highly lucrative takeaway food market.