I have been looking for shares to buy for my portfolio and have been eyeing a well-known high street retailer with a dividend yield of 7%. Not only that, but the valuation looks cheap too right now, with a price-to-earnings ratio of under 7.
Common high street sight
The share in question is retailer Card Factory (LSE: CARD).
Over the past five years, it has performed terribly and has halved in value.
During that period though, there has been a lot of turbulence. Compared to where it stood four years ago, for example, the stock is up 165%.
I see two big questions here from an investment perspective with answers that help explain the volatility: how strong is the business model and what is the long-term customer demand outlook?
Inconsistent business performance
On one hand, Card Factory looks to be performing well.
In the first half, for example, revenues grew 6% compared to the same period last year. Not only did its shops show like-for-like sales growth, the website delivered revenue up 9% compared to the prior year period.
Meanwhile, the business continues to build on its strengths. For example, it has recently agreed to a multiyear contract making it Aldi’s exclusive greeting card supplier in the British Isles, as well as completing the acquisition of a card and wrapping firm in Ireland.
But the bottom line is a bit less reassuring. Profit before tax in the first half was £14m. That was 43% below last year’s first half. Meanwhile, cash from operations fell 52% while net debt (excluding leases) grew 4%.
The swings we have seen in Card Factory’s financial performance in recent years point to a couple of ongoing risks. One is that it can be heavily affected if the number of shoppers on high streets falls a lot, as happened during the pandemic.
Another is that this business has fairly modest profit margins and is complex when it comes to choosing both the right stock and an appropriate amount of stock. I learnt those lessons owning shares in Clinton Cards and they turned out to be expensive ones for me!
Long-term demand may be resilient
Another concern is whether demand for cards will last. Stamp prices have gone up massively while postal service has declined sharply. Many parts of life have increasingly moved from paper to digital forms.
Card Factory’s digital expansion helps. But the key question is whether, 10 years from now, customers will want to buy its products.
I am quite upbeat about this. Card demand has proven fairly resilient, while ancillary products from balloons to party bags should stay high, in my view.
Potential bargain
Clearly the Card Factory price has been volatile and I am taking the risks seriously.
But I think the price looks attractive and so does the dividend yield. That could potentially make it one of my best choices when looking for new share purchases soon.
If I have spare money to invest in coming weeks, Card Factory will be on my list of shares to buy for my portfolio.
