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Neil Woodford’s just bought more of this dividend stock

As investment strategies go, buying quality companies with temporarily depressed share prices takes some beating. This is, after all, exactly what star fund manager Neil Woodford did with tobacco stocks many years ago — a move which ensured his enduring popularity among private investors.  

Never one to follow the herd, it seems Woodford has found another value play in the form of greetings cards retailer Card Factory (LSE: CARD) — a stock that occupies positions in both his Equity Income and Income Focus funds. In a recent update to clients, Woodford revealed that he had increased his ownership of the company following the huge fall in its share price after poorly received interim results.

To recap, last month Card Factory reported revenue growth of 6.1% to very nearly £180m over the six months to the end of July, despite a reduction in the number of shoppers hitting the high street. Trouble was, the £1.1bn cap also said that pre-tax profit for H1 was just over 14% lower — at £23.2m — compared to same period in 2016 thanks to a mix of adverse foreign exchange movements, the national living wage and ongoing investment in the business. Despite evidence of like-for-like sales growth, new store openings and progress online, many investors responded by heading for the exits. Not even the promise of “another” special dividend of 15p per share was enough to convince some to stay.

Sensing an opportunity, Woodford has piled in. In his view, market leader Card Factory’s decision to refrain from passing on currency and living wage-related price increases to its customers makes “absolute sense from a long-term strategic perspective“.  The company, he believes, remains a “well-managed, highly-competitive and cash generative retailer“. As fans of investing for years rather than weeks, this chimes nicely with the Foolish investing philosophy.

Having recovered somewhat since September’s sell-off, shares in Card Factory now trade on a forecast 16 times earnings. That’s not exactly cheap, but nor is it screamingly expensive for a company with a progressive dividend policy and tendency to return surplus cash to holders. It won’t double in value overnight but as part of a diversified portfolio of income-generating shares, Card Factory is certainly worth considering.

An alternative…

Having said all that, Bedfordshire-based gifting and stationery manufacturer IG Design (LSE: IGR) might be a suitable alternative to those who — unlike Woodford — are put off from investing in a retailer at the current time or who would rather focus on building their capital through growth-focused companies rather than receiving income.

August’s Q1 trading update contained few surprises with the company confirming that it was performing in line with management expectations. Recent highlights include the unification of IG’s three UK businesses, excellent sales growth in Continental Europe and a major new contract to supply greetings cards to Australia’s largest discounter. According to CEO Paul Fineman, IG’s order is “yet again at record levels“, supported by “excellent product innovation” and improved relationships with customers. 

Having four-bagged in value over the last three years, it won’t come as a surprise that shares in IG no longer offer the value they once did, trading as they do at 18 times forecast earnings. Nevertheless, for a company with a rock solid balance sheet, excellent free cash flow and rising returns on the capital it invests, there are certainly worse options out there.

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Paul Summers 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.