In the bustling world of technology companies, it is common to lament the lack of large tech shares listed in London as compared to New York. Despite this, there are a few companies in the UK that have showcased their ability to thrive in the competitive tech industry.
One such company that caught everyone’s attention recently is the accounting software specialist Sage (LSE: SGE). Its shares jumped an impressive 19% after unveiling its latest annual results, which revealed a remarkable 55% growth in basic earnings per share.
Simple Yet Successful Business Model
Sage’s success can be attributed to its simple yet effective business model. For decades, the company has been supporting small- and medium-sized businesses with their accounting needs through a range of software products and services. This model has proven to be not only profitable but also sustainable over time.
The demand for Sage’s services remains high, making the company a market favorite. Once businesses integrate Sage into their operations and employees become accustomed to its features, switching to competitors becomes inconvenient and time-consuming. This loyalty to Sage’s services gives the company pricing power, reflected in its robust financial performance last year. Revenues grew by 7%, reaching £2.3bn, while net profit margins climbed to 13.9%.
Growth in Dividends
With profits comfortably covering its dividend commitments, Sage has announced plans for an annual dividend increase of 6% and a share buyback program worth up to £400m. The company’s progressive dividend policy, coupled with its strong cash generation ability, indicates a promising future for dividend growth in the long run.
However, despite the growth prospects, the current dividend yield of 1.5% may not be enticing for some investors. It would take approximately 14 years for the dividend yield to catch up with the current FTSE 100 average if the annual growth rate remains at 6%.
High Valuation and Future Prospects
While Sage’s business fundamentals remain robust, the current valuation may give some investors pause. The company’s volatile profit swings indicate that it is not entirely immune to market fluctuations. Scaling up the business, although a potential growth opportunity, also poses certain risks if not executed correctly.
On the whole, despite my concerns about the current share price valuation, I am optimistic about Sage’s future prospects as a strong and innovative company in the tech industry. While the £13bn market capitalization might seem reasonable by US standards, I remain cautious due to the relatively high costs associated with investing in the company.
In conclusion, Sage stands as a prime example of a UK tech company with the potential for sustained success and growth in the dynamic tech landscape, despite the challenges associated with its valuation and market volatility. As investors, it is crucial to weigh the risks against the rewards before making any investment decisions.
