Will this income stock continue to deliver?

After two recent profit warnings and a slew of bad news elsewhere in the retail sector, income investors may well have feared the worst ahead of Card Factory (CARD) results this morning.

To their relief, the company announced a 2.2% rise in the total dividend to 9.3p and said there was the prospect of another ‘special’ pay-out later this year, albeit at a reduced level to December’s award of 15p a share.

The tone of the annual results was also positive, buoyed by record seasonal performances from Valentine’s Day, Mother’s Day and Easter. Chief executive Karen Hubbard, who has run the 915-strong chain since April 2016, added that the sending of physical greeting cards was “deeply ingrained in UK culture”.

Shares responded to today’s results by rising 6% to a level above 200p, although as recently as early January they had been trading at close to 300p.

Source: interactive investor              Past performance is not a guide to future performance

Even though today’s annual results for the year to January 31 showed impressive like-for-like sales growth of 2.9%, the company’s profits were dented by £14.6 million of headwinds, mainly from foreign exchange and the national living wage. Underlying earning per shares (EPS) were down 4.4% at 18.9p.

Cost saving initiatives are helping to offset some of the pressures, but Card Factory said that it does not expect a meaningful return to earnings growth this year. It remains hopeful that the headwinds will ease in FY20.

Card Factory is the only vertically integrated player in the sector, with its in-house design team, printing facility and central warehousing capacity allowing it to operate with significantly reduced costs compared with rivals.

It continues to open stores, with 50 added in the past financial year, at a time when other chains are closing outlets. Another 50 shops are planned for this year, as the company targets a “cost-effective estate” of 1,200 stores.

The group is highly cash generative, helped by strong operating margins. This has enabled the company to return a total of £268.4 million (78.7p per share) to shareholders via dividends since its IPO in May 2014.

This included a special dividend of 15p a share worth £51.2 million and paid to shareholders at the end of last year. It has now promised a further return of surplus cash alongside the interim results in the summer, although the proposed payment of 5-10p per ordinary share will depend on trading conditions.

The record of shareholder returns has attracted some high-profile supporters, including fund manager Neil Woodford. After a profit warning in October, he added to his position and said the sharp share price fall made no sense from a long-term strategic perspective. He praised the company as a “well-managed, highly competitive and cash generative retailer”.

UBS has a price target of 290p, while Peel Hunt recently named Card Factory as one of its top income stock picks for 2018, with a target price of 400p.

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