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It’s easy to complain about the lack of big tech stocks listed in London compared to New York. But there are some companies on this side of the pond that have proven they have what it takes to make it in the sometimes very competitive tech world.
One jumped 19% in early trading today (20 November) after the market digested its latest annual results, which showed a 55% increase in basic earnings per share.
A simple but proven business model
The assignment in question is an accounting software specialist Sage (LSE: SGE).
Sage’s business model is very simple but has been profitable over the decades. It helps small and medium businesses manage their accounting products, thanks to a series of software products and services.
I like that as a market and also as a model. Demand is high and likely to remain so. The service is ‘sticky‘, meaning that once firms are used to using Sage and their employees feel comfortable with it, there are disruptions and time costs to switch to competitors.
That helps give Sage’s pricing power, as seen in last year’s performance. Revenue grew by 7% to £2.3bn. Profit after tax jumped 53% to £323m. That means the company’s gross margin has reached 13.9%.
Long-term profit growth
That profit after tax more than covers the annual dividend, even after the proposed 6% increase. Indeed, the company is feeling the shock and has also announced plans to buy back up to £400m of shares. Given the current share price (up 75% since the beginning of last year), I personally don’t see that as a good use of spare cash.
Sage has a progressive dividend policy, meaning it aims to increase its payout per share every year. It has been doing that for many years and, as its business model continues to make a lot of money, I expect that if things go well it will continue to do so.
Still, while I like the growth prospects, I’m less excited about the yield. That currently stands at 1.5%. If the dividend per share continues to grow at the 6% achieved last year, it would take 14 years for the yield to match the current FTSE 100 average (assuming a lower share price).
Strong business, high valuation
And I don’t think the shares offer compelling value yet. As the sharp movement in profits last year shows, this is not a business immune to significant volatility. The risks I see on the horizon include turning to one of the business opportunities, which is scaling up.
Doing so effectively can help increase revenue before expenses, increasing profit margins. But a misstep, for example, misunderstanding the differences between certain markets, can be costly.
However, I continue to see this as a very good company with strong prospects. But it has a chunky tech price tag attached. A market capitalization of £13bn may look cheap by some US standards – but it’s too expensive for my liking.
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