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Earlier this week, I ran a screen on the UK market for dividend stocks with 6%+ yields that are currently trading 30% or more below their average analyst price targets. It produced over 20 names.
Now, most of the names on the list were smaller companies that you’ve probably never heard of. However, there was one well-known retailer on the list: Card Factory (LSE: CARD).
An attractive set-up
For the current financial year (ending 31 January), analysts expect Card Factory to pay out 5.3p per share in dividends. At today’s share price of 74p, that puts the stock’s yield at about 7.2%. As for the average analyst price target, it’s 111p. That’s around 50% above the current share price.
Now, at face value, this looks like a very attractive set-up. Not only does the stock offer a massive dividend yield, but analysts see the potential for huge share price gains.
If that price target was to be hit over the next 12 months, investors could be looking at total returns of nearly 60%. That’s a lot more than most UK dividends stocks are likely to offer.
An opportunity for income and gains?
Is there a legitimate opportunity here? Potentially. Starting with the dividend, it’s expected to be well covered by earnings. With earnings this year projected to be 12.9p per share, we get a dividend coverage ratio (earnings per share divided by dividends by share) of 2.4, which is really healthy and suggests a cut’s unlikely in the near term.
As for that 111p price target, I don’t think it’s unrealistic (although price targets should never be relied upon). Because at present, Card Factory trades on a price-to-earnings (P/E) ratio of less than six.
That’s a really low valuation. If the stock rose 50%, the P/E ratio would still be under 10, even with no earnings growth.
What’s the catch?
Now, of course, there’s no such thing as a free lunch in the investing world. So with the yield sitting at a high 7.2% and the valuation at rock-bottom levels, we have to examine the risks here.
One major risk is weak consumer spending. Today, UK consumers don’t have a lot of spare cash, and this means discretionary products like greetings cards and party accessories could be less of a priority.
Another risk is a lack of industry growth – according to Grand View Research, the UK greetings cards market is only likely to grow by a little over 1% per share between 2026 and 2033. This could create challenges for Card Factory.
There’s also the fact that the company has cancelled its dividend in the past. This adds some uncertainty for income investors.
Safer opportunities today?
Is the stock worth the risk? I think it’s worth considering as a value and income play. But given the lack of long-term growth story, it’s not the first dividend stock I’d buy if I was putting capital to work today.
In my view, there are better dividend shares to consider buying.
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Edward Sheldon does not hold any positions in the companies mentioned.
