As a former chartered accountant, I feel can say this. Most accountants are boring, and the work they do is backward-looking and dull. I’m sorry, but it’s true. Does anyone really get excited by nominal ledgers, trial balances and tax returns? Those words still send a shiver down my spine, bringing back old memories of hours hunched over an analysis pad and calculator, squeezed into a windowless back office at one client location or another.
I trained in the industry before computers. The latest technology around at the time was a Kalamazoo paper-based accounting system, and when the comptometer operator — remember them? — appeared on-site with a giant adding machine, we all became excited. How things have changed. Who would have thought the dreary business of double-entry bookkeeping and payroll accounting could lead to a thing of financial beauty?
Established in 1981 — interestingly, the same year I started training to become a member of the Institute of Chartered Accountants — Sage Group (LSE: LON:SGE) has helped transform the accounting industry with its desktop and cloud-based accounting and payroll software. You may not know the company’s name, but I guarantee you many small and medium-sized companies in your neighbourhood will be using its products. Today, it sells to 23 countries throughout Europe, Africa, Australia, Asia and Latin America.
So far, so boring. What gets me excited, however, is the financial performance of the company.
Financial wizardry In the year to 30 September 2018, revenues were £1.85 billion, an increase of 40% over the previous four years. Last year, the company produced an operating profit of 25% on sales, and as the balance sheet contains only a modest amount of debt, most of that profit fell through to the bottom line. Over the last 12 months, it has generated a return on equity of 24% which is nothing short of financial wizardry, in my opinion. Sage is a cash machine, too; in 2018 it generated free cash flow of £280 million, almost the same as its net income. The stock has produced an average dividend yield over the last five years of some 2.3%, paying out a little over half of its net income.
With numbers like these, it is little wonder the share price has rocketed. Over the last 10 years, it has risen four-fold, which means it’s not cheap today. In fact, the stock has climbed 20% during 2019 alone. With an historic PE of 26x, this investment is not for the faint-hearted.
But, in my view, there is still growth ahead as more of its customers move over to the cloud and take up the company’s software-as-a-service offerings, something that makes the customer base even stickier. You only have to look at Sage’s North American equivalent, Intuit (NASDAQ:INTU), to see just how much money can be made from selling accounting solutions to mid-sized companies. Plus, with its fortress-like balance sheet, I believe Sage can withstand any downturn. With its prodigious cash flow, Sage would be well placed to gobble up some of its smaller competitors in a down market.
Martin Bodenham owns shares of Intuit. 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