A 6% dividend yield and 6.2x forward earnings… what’s the catch?
With the stock market performing rather well in recent months, Iâve increasingly been looking harder to find the stocks I want to add to my portfolio. And when stocks go up, dividend yields typically fall as the relationship is inverse.
One small-cap stock that caught my eye is Card Factory (LSE:CARD). Itâs not the most exciting company in the world, or even in the UK, but it could be an exciting stock. The companyâs valuation multiples are very low and the dividend yield is top tier.
What the numbers tell us
Card Factoryâs valuation profile is attractive compared to the broader retail sector. Net profit is forecast to climb from a forecast £52.9m in 2026 to £56.4m in 2027 and £60.5m in 2028.
This growth is reflected in a steadily declining price-to-earnings (P/E) ratio. The P/E is forecast at 6.2 times for 2026, 5.6 times for 2027, and just 5.2 times for 2028. These figures are well below the UK retail sectorâs historical averages, suggesting the market is undervaluing Card Factoryâs consistent earnings delivery.
Dividends are set to increase in tandem with profits. The dividend per share is projected to rise from 5.7p in 2026 to 6.3p in 2027 and 6.7p in 2028, offering prospective dividend yields of 6%, 6.7%, and 7.2% at current share prices.
The dividend payout ratio remains conservative, moving from 37% in 2026 to 38% in 2028, indicating that dividends are comfortably covered by earnings and leaving room for further increases or reinvestment.
The balance sheet is also improving but remains one of the few areas of concern. Net debt is forecast to fall from £117m in 2026 to £108m in 2027, and further to £78 m by 2028. These figures may differ from Card Factoryâs own reporting, potentially due to lease liabilities. Card Factory itself reported only £58.6m in net debt in January 2025.
Potentially overlooked
Card Factory may be overlooked by investors despite its strong operational performance and market leadership. The company has consistently outperformed a sluggish celebrations market, growing basket spend and expanding its store footprint. However, its shares have not always responded positively to robust results.
Part of this disconnect may be due to the broader perception of the greeting card sector as low-growth. The physical card market is expanding at just 0%â1% annually and customers remain price-sensitive. Additionally, Card Factoryâs value-led proposition and focus on affordable products can lead to it being pigeonholed as a defensive, rather than a growth, stock.
However, clearly analysts see some potential here. There are currently seven analysts covering the stock with six Buy ratings and one Hold. The average share price target is a whopping 73% above the current share price.
Itâs certainly worth considering, and Iâm going to take a good look at the stock. Itâs great on paper, I just wonder how it can stop being overlooked by investors. It may take a solid earnings beat.
The post A 6% dividend yield and 6.2x forward earnings⦠whatâs the catch? appeared first on The Motley Fool UK.
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James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
