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Should income hunters follow Neil Woodford into these high yielding stocks?

Among the usual pharmaceutical and tobacco giants, Neil Woodford’s new Income Focus Fund also contains a good number of smaller businesses offering high yields. Is there a case for investing in these companies directly? Let’s take a look at two examples, both of whom updated the market today.

Further returns expected

Making up 2.02% of Woodford’s new Income Focus Fund, £1.1bn cap Card Factory (LSE: CARD) revealed an encouraging Q1 trading update this morning. For the three months to the end of April, underlying group sales over the period rose 6.1% — a solid improvement on the 4.3% growth rate achieved in FY17. Like-for-like sales at the greetings card specialist’s stores were also at the “upper end of a targeted range” of between 1% and 3%.

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On an operational level, Card Factory opened 11 new stores over the period with a target of 50 for the full year. Retail park stores are “performing well“, according to the company, as is its trial entry into the Republic of Ireland. The company’s online operation, cardfactory.co.uk, appears to be progressing and — despite the huge levels of competition in this space — I agree that targeting this “attractive segment” makes a whole lot of sense.

Right now, you can pick up shares in Card Factory for 16 times earnings. Considering the company’s financial track record, that feels reasonable. Operating margins and returns on capital have been more than decent for several years now. Moreover, the company’s commitment to (gradually) reducing the amount of net debt on its books — £125m at the end of Q1 — is pleasing to see.

Aside from the above, another reason for considering the Wakefield-based business’s shares is today’s declaration that the company would be “making a further return of cash to shareholders” by the end of the financial year. With more details to be revealed in September’s interim results, I suspect a direct investment in Card Factory is worth considering.

Dividend delight

Also reporting today was another Woodford favourite — consumer payment specialist Paypoint (LSE: PAY).

For the year ended 31 March, revenue from its retail network climbed 3.6% to £203.4m with pre-tax profits sneaking up 1% to £53.3m. Perhaps most encouragingly, retail services net revenue jumped 31.6% to a smidgen under £40m.

In addition to launching its new platform — PayPoint One — last year saw the company sell its Mobile business for a £19.5m profit and restructure its Collect+ arrangement to allow it to serve other UK carriers.

Importantly for dividend chasers, the announcement of a 30p final dividend payment brought the company’s total payout to 45p per share — a 6.1% increase on the previous year. Encouragingly, management also revealed an additional dividend payment of 36.7p would be paid in accordance with its policy of returning cash to shareholders until 2021. As such, total dividends paid to holders for the financial year would come in at 120.6p per share.

Based on 2018 projections, PayPoint’s shares trade on 15 times earnings. For a company with enviable levels of free cashflow, no debt, a history of high operating margins and excellent returns on capital, that looks great value to me. The generous dividend policy also underlines just why Neil Woodford is such as fan (it makes up 1.43% of the Income Focus Fund). While market reaction to today’s numbers is fairly uninspiring, I think Paypoint deserves a place on most income hunters’ wishlists.

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