Card Factory (LSE:CARD) is a UK stock that has steamed higher this week. In fact, it has surged by 21% in just two days, including a 13% rise today (30 September).

Yet the interesting thing here is that the stock still offers a forecast dividend yield of 6%. So let’s open up Card Factory and see what’s going on…

Prejudgement

A few weeks ago, I started digging into Card Factory after spotting its huge 8% dividend yield. At first, I presumed the greetings card retailer was in trouble and that its sky-high dividend would ultimately be heading for the guillotine.

Yet you should never judge a stock by its yield, to coin a phrase. Because after a bit of research, I saw that the underlying business actually looked quite resilient, despite being valued really cheaply.

Moreover, the forecast dividend was seemingly well covered by earnings. On 13 September, I concluded: “A [dividend] cut doesn’t seem likely to me, at least in the near term. For bargain-hunters, the jumbo 8% dividend yield and super-cheap valuation make this stock worthy of further research“. 

A business in transition

Yesterday, Card Factory released a solid set of results for the six months to 31 July. Revenue increased 5.3% to £260.8m, with contributions from its wholesale business and the Funky Pigeon acquisition. Adjusted EBITDA ticked up 2% to £45.1m.

Obviously, these are not figures to salivate over, but Card Factory has improved store profitability through an efficiency drive. And Republic of Ireland stores performed strongly, with total sales up 24.3% and like-for-like sales up 5.6%.

The Funky Pigeon acquisition looks like a smart one to me, as it taps into the growing online card buying trend. There was an 11% increase in new digital customers during the half.

Also, as mentioned, the firm has a growing wholesale business, which sees it supply cards to The Reject Shop, Aldi, and others. There’s decent growth potential here, both in the UK and abroad.

If we step back then, we can see Card Factory transitioning from a predominantly UK store-based card retailer into something larger and potentially more valuable. As well as 1,126 shops, it has a growing digital greetings card operation, wholesale partnerships, and international ambitions.

The ‘Golden Quarter’ is approaching

Of course, it would be remiss not to mention the challenging consumer environment. Household energy bills are expected to soar 16% in January, the biggest jump in four years. Food inflation is also rising.

Will consumers cut back on buying Christmas cards/gifts and throwing parties? Sadly, this can’t be ruled out.

That said, Card Factory remains cautiously optimistic about the forthcoming ‘Golden Quarter’. This encompasses the Halloween and Christmas periods when demand for cards, gifts, bags, wrapping and party staples goes through the roof.

While pressure on household finances continues to influence purchasing decisions, customers remain committed to celebrating life’s important moments.

Card Factory.

In a sign of confidence, the interim dividend was hiked 7.7%. And even after the sudden share price rise, the forecast yield for this financial year is a very attractive 6%.

Combine this with a forward-looking price-to-earnings ratio of just 6.9, and I reckon the stock is still worth considering for bargain-loving income seekers.

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Ben McPoland has no position in any of the companies mentioned.