Buy ahead of Card Factory's return

The possibility of a special dividend looks good. The group has about £70m of cash, but management could also test the limits of the group's leverage to hand cash back to shareholders. It's already admitted to extending a £200m debt facility put in place at the flotation. At the moment it's all speculative, but some of the numbers thrown around by City analysts make for compelling reading.

Investec reckons that, should Card Factory allow the balance sheet to be geared up to 1.4 times net debt to cash profits, it could return £220m over the next four years. Assuming that Card Factory's earnings stay stable, Investec believes that scenario is plausible. Peel Hunt even says that pushing the payout limit to two times net debt to cash profit could generate £330m (£1 a share) over three years. But that's a tad extreme given Card Factory's capital-spending demands and the broker thinks the group is likelier to stay within the more conservative range. Even so, Peel Hunt says investors should expect a minimum of 65p a share over the next three years.

Management has given no detail on special returns yet, and it won't make any announcement before September's half-year results. But Peel Hunt says it's a question of "when not if" and, at current levels, assuming 70p in dividends by 2017, the shares yield the annual equivalent of between 7 and 10 per cent. Card Factory is an unusual retailer because it generates cash profit every month and more than two-thirds of sales come from everyday cards rather than being weighted to national holidays or Christmas. That should give it plenty of headroom for generous, albeit manageable, returns.

There are some unprecedented costs lying ahead. The introduction of a new living wage has prompted some analysts to tweak their pre-tax profit figures for the 2017 and 2018 financial years, and as long as the dollar stays strong, there's a currency headwind to battle. However, moving into the 2016 financial year, the company has hedged 90 per cent of its US dollar buying so, as long as the exchange rate doesn't move materially, this is likely to offset any effect.

Investors in Card Factory can be confident in the company's near-term growth prospects, too. Like-for-like sales are up 2.7 per cent in the first half, while total sales are up 8 per cent. The latter figure has been boosted by a string of new openings. Card Factory opened 36 new sites in the first half and remains on track to deliver 50 new outlets before the end of the year. At the end of July, it had 800 stores in operation. The relaunch of the Card Factory online site also helped boost sales during the first half.