Huntsworth plc is a dividend-growth stock for shrewd investors

Global marketing agency Huntsworth(LSE: HNT) has hardly been the most exciting stock to own over the past five years. In 2014, the company was forced to begin a massive restructuring effort after losing some major clients. Between mid-2014 and year-end 2016, the shares went nowhere.

However, it now looks as if management's turnaround efforts are finally starting to pay off.

Today, Huntsworth announced that profit before tax for the six months to 30 June had exploded 58% as restructuring charges fell away and overall revenue increased 9%. Off the back of this growth, earnings per share rose 41% to 2.4p on a headline basis. This robust growth has given management the confidence to hike the company's dividend payout for the period by 10% to 0.55p.

As well as being able to generate a 58% increase in headline profit, the group also paid down £10m of debt taking net debt to £26.8m from £37.1m.

Rising healthcare spend

Huntsworth's best performing division is its health marketing arm, which has proved to be a reliable and predictable business over the past few years as the rest of the group has undergone restructuring. Management expects this trend to continue. To help bolster its offering, the company recently acquired The Creative Engagement Group for a total consideration of £24.7m. The acquired group consists of three agencies that provide experiential marketing, primarily to healthcare clients.

Huntsworth Health is the growth engine of the business, and as the demand for health care and health services continue to increase, the group's existing position in the market should ensure further success. During the first half of the year, the health arm grew revenue and profits by 33% and 20%, respectively, on a like-for-like basis. Two individual agencies within the healthcare division saw revenues grow by 26.4% and 15.3%, respectively.

Rapid growth ahead

Huntsworth's presence in the healthcare industry gives it an almost defensive nature. Marketing health care products and services requires specialist knowledge, so those businesses with the largest established presence will always be in demand. City analysts expect this demand to help Huntsworth grow earnings per share by a full 36% for 2017 to 4.6p, the highest level in more than three years. Double-digit earnings per share growth is expected for 2018 as well, with earnings of 5.3p per share projected.

Based on these estimates, shares in Huntsworth are trading at a 2018 P/E of 11.9, which seems too cheap considering the company's explosive growth.

Room to run higher

Now that management has shown that the business has returned to growth, I believe it's only a matter of time before the market re-rates the shares higher. And based on the earnings growth rate of 15%, it's not unreasonable to suggest that the shares could trade up to a multiple of 15 times forward earnings, or 79.5p per share based on current estimates.

With this being the case, City projections seem to suggest that shares in Huntsworth are undervalued by more than 26%. As the company's dividend payout is covered by more than two-and-a-half times by earnings per share, there's also plenty of room for dividend payout growth in the years ahead.

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Rupert Hargreaves does not own 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.

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