Today, I want to look at a FTSE 100 share I’ve admired for a while and am now poised to buy. The company is accounting software specialist Sage Group (LSE: SGE), one of the UK’s few large tech stocks.
Sage shares have delivered an average annual return of more than 10% per year over the last decade, including dividends. This is roughly double the 5% average total return the FTSE 100 has provided over the same period.
Despite this strong record, the latest numbers from Sage triggered a share price sell off. I think this fall may have been overdone, providing me with a potential buying opportunity. Let me explain.
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Why is this FTSE 100 share falling?
In recent years, Sage has been gradually shifting its customers from standalone software to online subscription services. Although this should result in more reliable and predictable revenue in the future, in the short term, it’s putting some pressure on profit growth.
The pandemic seems to have accelerated this change. Revenue from software subscriptions rose by 20.5% to £1,141m during the first half. However, this impressive result was offset by a 26% fall in traditional software sales.
To add to the pressure on profits, sales of additional services to new customers slowed during the six months to 30 September. I don’t think that’s surprising really, given the impact of the pandemic.
Sensibly, Sage management isn’t taking short-term measures to boost profits. Instead, the company is continuing to invest in new products and services to drive future growth. I think this is sensible, but it’s coming at a cost.
The firm’s guidance is that profit margins could fall by up to 3% next year, due to increased investment in online products. My sums suggest this could see the firm’s profits fall next year, before gradually recovering in future years.
Why I’d buy Sage shares
The short-term outlook for Sage might be a little cautious. But I’m looking at this as a long-term investment. For me, the numbers stack up pretty well.
For example, the firm’s latest accounts show Sage generated an operating profit margin of 21% last year. That’s well above the average for FTSE 100 shares. I think the company can afford to sacrifice a little short-term profit in exchange for longer-term growth.
A second attraction is that Sage has little debt and strong cash generation. Without getting too technical, the firm tends to convert all of its annual profits into surplus cash. Not all companies can do this.
In my view, this is the kind of high-quality FTSE 100 stock I want in my long-term ISA portfolio. I’m not alone in this view either. Two of the UK’s top fund managers, Nick Train and Terry Smith, each own about 5% of Sage. They’re both noted long-term investors with a focus on quality.
Sage’s share price has fallen by 25% from its 52-week high of 794p. At around 580p, this FTSE 100 share trades on around 20 times earnings, with a 3% dividend yield. For a company of this quality, I think that’s a fair price. I may well buy Sage for my portfolio in the coming weeks.
