A 7.3% dividend yield at a 5.5 P/E! Should I buy this cheap stock?

While UK shares went on a double-digit rampage last year, there are still plenty of cheap stocks to explore in 2026. And among the cheapest stands Card Factory (LSE:CARD).

Over the last five years, these shares climbed by almost 80%. But in the last 12 months, the gift retailer has seen its market-cap shrink by just over 30%, bringing its price-to-earnings (P/E) ratio to a dirt cheap 5.5, while boosting the dividend yield to a tasty-looking 7.3%.

So what’s behind this downturn? And has the volatility created an exceptional buying opportunity for value-focused investors?

What happened?

For most of 2025, Card Factory’s stock price was fairly stable. It wasn’t until December came along that a spanner was thrown into the works.

With the UK economic landscape less than ideal, consumers have started cutting back on non-critical discretionary spending. And for a business that specialises in greeting cards, gifts, and celebration products, that’s far from an ideal operating environment.

The result? Shortly before 2025 came to a close, the company issued a profit warning that understandably spooked investors. Instead of delivering pre-tax profit of £70m as previously expected, management revised its guidance down to a range of £55m-£60m. And the stock price plummeted by 27% in a single day.

While this profit warning was the key catalyst for volatility, it likely wasn’t the sole cause. Like many high street retailers, Card Factory’s been coming under pressure from changes in government policy as well.

Increases to the Minimum Wage and National Insurance contributions have taken their toll. And with inflation driving up both raw material and logistical costs, as well as rising competition from supermarkets like Tesco and Sainsbury’s, profitability’s been squeezed for most of 2025.

However, with these headwinds now seemingly already baked into its share price, has Card Factory been transformed into a top, cheap stock to buy?

A golden opportunity?

As of 2026, Card Factory’s currently the only UK brick & mortar greeting card retailer that controls design, printing, and distribution all under one roof.

While this vertical integration does add complexity, it also gives management complete control over every stage of operations. And leadership’s subsequently been using this control to implement its ‘Simplify and Scale’ strategy, unlocking new efficiencies and savings covering everything from redesigning store layouts to automating manufacturing processes.

With benefits expected to emerge in 2027, the current pressure on profit margins may only be temporary. And if the economic environment improves simultaneously, Card Factory could be well-positioned for a rebound in both sales and profits within the next 18-24 months.

So is this a screaming buying opportunity for a quality, cheap stock?

It might be. But it’s important to recognise that a rebound’s far from guaranteed. The company still has to tackle a notable debt burden amid a profit decline. And with the greeting cards market in a secular decline, Card Factory’s growing increasingly dependent on the lower-margin gift side of its product portfolio.

In other words, profitability improvements through efficiencies may ultimately be offset by a secular shift in product mix. Nevertheless, with a P/E of just 5.5, these risks may be worth mulling over.

The post A 7.3% dividend yield at a 5.5 P/E! Should I buy this cheap stock? appeared first on The Motley Fool UK.

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Zaven Boyrazian 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.

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