Today, well-known integrated accounting, payroll and payments solutions provider The Sage Group (LON:SGE) (LSE: SGE) delivered another set of decent half-year results. The share really has been a consistent performer over the years, delivering stonking total returns made up of capital and dividend gains for shareholders. But I think there’s more to come and I’d hold on to Sage for the long haul.
‘Sticky’ revenues In terms of the underlying figures, total revenue rose 4.9% compared to the equivalent period the year before. Within that figure, recurring revenue increased by 9.9%. A big part of the appeal for me with operations at Sage is that the product is ‘sticky’. When customer firms and organisations embed the Sage system into their business, switching costs and inconvenience are high, so many continue with Sage rather than face all the hassle of changing to another supplier. I think that situation makes cash flows steady and predictable for Sage and the firm has many defensive characteristics that will likely keep the dividend growing in the years to come.
Indeed, the dividend has risen around 46% over the past five years, and at today’s share price close to 728p, the yield is running close to 2.3%. That’s not high, but I think it remains attractive because it’s growing. The price-to-earnings ratio for the current trading year stands at about 24, which shows that the valuation is quite lofty. But I think Sage is a quality outfit that deserves a higher rating and I don’t expect the valuation to slide any time soon, as long as growth remains on track.
The directors expressed their own satisfaction with today’s figures, and confidence in the outlook, by pushing up the interim dividend by 2.5%. Chief executive Steve Hare said in the report that the company experienced a “strong start” to 2019. He confirmed that Sage aims to become a great Software-as-a-Service (Saas) company and the focus is on “driving high-quality recurring and subscription revenue” during the second half of the year, which implies sales online.
Migration to the cloud Things have moved on with the firm’s offering in recent years and now Sage claims to be “the global market leader” for technology designed to help businesses “of all sizes” manage “everything from money to people.” Much of the business is facilitated by Sage Business Cloud, which the company snappily describes as “the one and only business management solution that customers will ever need.” Putting aside for the moment all the marketing puff, I think the concept of getting customers to be dependent on the Sage product and service has a lot of merit.
The outlook is positive and I can see nothing in the report that indicates revenues, profits and the dividend will falter. I expect we could see modest annualised increases for years to come and would be happy to park some of my money in the shares.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Sage Group. 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