2018 hasn’t proved to be a year to toast for investors in The Sage Group(LSE: SGE). It’s not the only blue-chip in town enduring a punchy share price reversal this year, of course, but the 25%+ drop would make even the hardiest of share pickers wince.
There’s signs though that the FTSE 100 could be about to turn significantly higher. After the profit warnings of previous months Sage finally delivered the goods with a robust full-year release in late November, an update that has helped its share price recover some ground whilst the rest of the Footsie has sunk in patchy pre-Christmas trades.
On the mend
I warned before that last month’s update could have broken Sage again should fourth-quarter licences have disappointed. Fortunately that wasn’t the case and consequently the business was more-or-less able to meet its organic revenue growth for the 12 months to September with a 6.8% advance to £1.82bn, just short of its targeted 7% rise.
Pessimists may be shouting that the planned sale of Sage Payroll Solutions helped lift this figure — it would have been 6.6% otherwise. I’m a glass-half-full man right now, however, and am more interested in the strong sales momentum that the company is enjoying.
Indeed, Sage put its nightmare first half behind it and reported that organic turnover hit its 7% growth goal during the April to September period. This sales step-up was thanks to a “renewed focus on high-quality subscription and recurring revenue,” and performance was even better for August and September as sales rose above 7%, giving the business brilliant upward trajectory into fiscal 2019.
Competition is tough but I’m confident that by stepping up its drive into the ‘software-as-a-service’ segment that the Footsie firm can deliver spectacular returns in the years ahead. Indeed, chief executive Steve Hare last month announced plans to accelerate investment in SaaS to boost long-term sales and bring it more into line with the R&D spend of its rivals and for the current year it will spend an extra £60m.
That improving sales performance into fiscal 2019 saw Sage keep its ultra-progressive dividend policy on track, and it raised the full-year dividend for last year 7% year-on-year to 16.5p per share. And shareholders can expect the business to keep raising dividends, in my opinion.
City analysts currently expect earnings to dip 6% in the year to September 2019, but I can see this figure being upgraded given the strong revenues progression of recent months. Even if it isn’t, though, Sage still has the financial strength to keep raising the dividends even in times of temporary earnings pressure. Put simply, the software star is a cash machine and free cash flow improved to £356m last year from £276m the year before that, and this helped net debt-to-EBITDA improve to 1.2 times versus 1.6 times previously.
The number crunchers agree with me and they’re predicting a 16.9p per share payout for fiscal 2019, meaning investors can enjoy an inflation-beating 2.9% yield. Now Sage may be a bit expensive on paper because of its forward P/E ratio of 19.3 times. But given the possibility that its share price could fly in 2019 I reckon this is a small price to pay. All things considered it’s a top buy, in my opinion.
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Royston Wild has no position in any of the shares 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.