Is this small-cap high flyer still a better buy than this cheap 7% dividend stock?

Paul Summers takes a closer look at the latest set of figures from IG Design plc (LON IDG). Can the share price keep rising?

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From a share price perspective, the performance of greetings card retailer Card Factory (LSE: CARD) and gift packaging manufacturer IG Design (LSE: IGD) in recent times couldn’t be more different. While the former has fallen more than 45% since last September, the latter is flirting with record highs. 

Will this state of play continue? And given that a great company doesn’t always translate to a great investment, might it be better to buy the cheaper of the two at the current time?

“Very bright future”

Based on today’s full-year results from IG Design, you’d suspect the Bedfordshire-based firm will continue to reward its owners.

With the company performing well in all regions in which it operates (but particularly in the US, Europe and Australia), revenue rose 5% to £327.5m over the year to the end of March. Positively, 73% of sales came from outside of the UK — underlining IG’s geographically diversified operations. Indeed, its products can now be found in more than 200,000 in over 80 countries.

When you consider that underlying pre-tax profit soared 32% to £21.4m, the decision to raise the final dividend by a whopping 45% isn’t all that surprising.  Although not an income stock by any stretch of the imagination (the forecast yield for next year is just 1.5%), the fact that the payout is covered 3.6 times by profits means there’s ample scope for this to continue to rise.  

CEO Paul Fineman sounded confident on the company’s outlook in 2018/19, reflecting that IG was “very well placed to continue to grow organically, across all regions and channels”. Add to this the possibility of acquisitions and the business has a “very bright future“, in his view.

Of course, management will always attempt to accentuate the positive whenever possible.  Nevertheless, recent developments do suggest that more positive news on trading could be on the cards.

The cash-generative nature of IG’s business has allowed the company to almost double its level of investment from £5.1m in 2017 to £9.4m in the last financial year, allowing a new state-of-the-art printing press to be installed in the Netherlands (providing the company with more capacity) and an IT upgrade in the US. The company’s acquisition of Australian card and paper products company Biscay Greetings for £5.5m cash back in April will also help it grow market share in this territory as the former is gradually integrated. 

After an initial burst at the opening bell, IG’s shares fell flat later this morning, suggesting that the market had already anticipated an encouraging set of numbers. With stock already trading at a relatively high 19 times forecast earnings for the 2018/19 financial year before this morning (and having climbed 33% in value over the last year alone), it’s understandable if a few market participants have chosen to take some money off the table.

Tough environment

In contrast to the above, recent numbers from Card Factory haven’t been anywhere near as impressive.

Last month’s trading update for Q1 to 30 April wasn’t particularly well-received by the market, despite management stating that performance had been “robust” and that expectations for the year remained unchanged. To recap, the company saw sales growth of 3% over the period but like-for-like sales fell slightly due to what the company reflected as a “tough retail environment“.

With the high street continuing to suffer (CEO Karen Hubbard made a point of highlighting “subdued footfall“), I’m still to be convinced by Card Factory’s strategy of continuing to grow its estate. Ten net new stores were opened in the UK over the period with a target of 50 maintained for the 2018/19 financial year. Personally, I’d prefer the company to focus on its online offering, particularly given the strong sales growth” achieved at over the first quarter of trading.

There are some positives though. Trading on a little under 11 times earnings for the current financial year, it looks fairly cheap compared to industry peers. Returns on capital employed and operating margins are also higher than those at IG Design. What’s more, the monster forecast 7.4% yield is undeniably attractive, particularly for those who have the patience to stick with the company as it works its way through this undeniably sticky period.

If you believe Card Factory can thrive in time, the shares could offer considerable upside from here. For those willing to pay a higher price for the benefit of being largely protected from the UK’s troubled retail sector however, IG looks the safer bet.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of Card Factory. 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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