Not every income stock worth owning is hiding in the FTSE 100. Some of the most compelling high-yield opportunities are sitting quietly in smaller indices, overlooked by the market and priced for pessimism. And right now, Card Factory (LSE:CARD) might be one of them.
At a current share price of 68.6p, shares of the speciality retailer are offering a pretty chunky dividend yield of 7.3%. And with just £500, I can snap up roughly 729 shares today. But the question is, is this even a good idea?
Why is the yield so high?
Experienced income investors will know that when yield ventures beyond 7%, it’s rarely an accident. And it’s often a reflection of genuine uncertainty and risk.
Zooming in again on Card Factory, the company has faced a bruising combination of headwinds in recent years. This includes rising wage costs that have been amplified by increases in employer National Insurance contributions.
At the same time, a cautious UK consumer, still navigating through an ongoing cost-of-living crisis, has kept discretionary spending under pressure.
The result has been a share price that has drifted steadily lower, pushing the yield higher in the process. That’s a crucial point, given that it means the yield is being primarily driven by concerns of sustainability and not because the company has been aggressively hiking dividends.
Yet when looking at the group’s latest results, shareholder payouts are still growing, albeit by mid-single-digits. So, is this market scepticism actually justified?
The contrarian view
Despite the challenging backdrop, there is a potentially compelling recovery thesis here.
Card Factory is the UK’s largest specialist greeting card retailer, with over 1,000 stores. But it’s also one of the few businesses in this sector operating with a vertically integrated business model.
By having the designing, manufacturing, and retailing of its products all under one roof, management has exceptional control over the firm’s cost structure, opening the door to superior profit margins and flexibility against most of its direct competitors.
Meanwhile, the rollout of its expanded gifting and celebration essentials range is broadening the basket size per visit. In other words, the company is maximising the value of its customers instead of simply trying to boost store footfall alone.
Pairing all this with its international franchise partnerships, the group’s cash flows are proving far more resilient compared to the rest of the sector. And it’s one of the main reasons why management is seemingly comfortable raising shareholder payouts despite navigating through tough market conditions.
The bottom line
Even with a compelling under-the-radar bull case, the risks remain real.
Any further deterioration in consumer confidence or another wave of cost inflation could quickly test management’s dividend commitment. And with discretionary gifts often being first on the chopping block during economic shocks, Card Factory’s earnings could come under even more pressure in the coming months.
That’s why right now, I remain untempted. But for investors with a higher risk tolerance hunting for a high-yielding income stock with a genuine path to recovery, Card Factory may be difficult to ignore at today’s price.
Should you invest £5,000 in Card Factory Plc right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Card Factory Plc made the list?
Zaven Boyrazian does not hold any positions in the companies mentioned.
