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Why I’d still snap up this growth stock with a 3.6% prospective dividend yield

Kevin Godbold
A stock price graph showing growth over time

The market likes today’s half-year results report from cybersecurity products and services provider Avast (LSE: AVST), and the shares are up almost 6% as I write.

The firm is unusual, in my view, because it has decent-looking growth prospects and a modest valuation. Indeed, you could even view it as a candidate for an income-driven portfolio because the current share price near 346p throws up an anticipated dividend yield of around 3.6% for 2020. Meanwhile, City analysts following the firm expect earnings to grow by around 8% that year.

Strong in its niche

You might have heard of the firm’s Avast and AVG brands. The company is prominent in its field, and I find today’s figures to be encouraging. In terms of the adjusted numbers, like-for-like revenue rose just over 9% compared to the equivalent period a year ago and earnings per share moved a little higher than 7%. And in a measure that suggests cash is flowing into the business, net debt reduced by more than 15% too.

The directors expressed their satisfaction and confidence in the outlook by declaring an interim dividend of 4.4 US cents per share. Avast commenced dividend payments for the first time during 2018 and aims to pay out 40% of its levered free cash flow.

Chief executive Ondrej Vlcek explained in the report that the revenue gains in the period were driven by “double-digit” growth in the firm’s Consumer Direct Desktop business. Initiatives such as cross-sell promotions “within the installed user base” helped the outcome.

Looking ahead, Vlcek said Avast reached “an important strategic milestone” in the period with the release of direct-to-consumer and carrier-based Internet of Things (IoT) solutions. He reckons the products’ “cutting-edge” technology will protect users’ “entire digital lives.” The directors are “very excited” about the opportunity ahead, he said.

The outlook is “strong” for the full year to the end of 2019 and the company now expects revenue growth for the year to be “at the upper end” of the previously stated single-digit percentage range.

Ongoing demand and an expanding product base

I last wrote about Avast when it issued last year’s full-year results report in March. Back then, the share price stood at 298p, so today’s 346p represents an increase of just over 16%. That’s not a bad return over five months but I reckon there’s a lot more to come from the firm in terms of total returns for shareholders over the years ahead.

The company’s constant research & development activity seems to be generating new products that it is able to cross-sell to existing customers as well as to new ones. I can’t imagine the need for cybersecurity ever going away in today’s world and reckon the forward-looking earnings multiple of just below 13 for 2020 looks fair. I like this one and still view the stock as attractive with a long-term holding period in mind.

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Kevin Godbold has no position in any share 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.

Motley Fool UK 2019