Investors hunting for tech stocks often look to the US. But there are some good tech companies in the UK too. In my opinion, one of the best shares to buy now is just such a tech stock.
Here I explain why I like it and would consider adding it to my portfolio with a spare £1,000.
Profits not prophets
One of the challenges many tech stocks have is that they lose money. A tech company may have a grand vision of what it hopes to do in the future, but on the road to get there a lot of cash is burned.
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By contrast, British software company Sage (LSE: SGE) has a long track record of profitability. Last year, it reported profits of £310m. That equated to earnings per share of 28p.
That is attractive to me in part because it enables the company’s progressive dividend policy. The dividend last year was 17.25p. That means it was amply covered by earnings, but also marked an increase from the year before. That continues a trend of raising the dividend each year for two decades. Dividends are never guaranteed, so that won’t necessarily continue. But it shows that Sage takes its dividend seriously.
Tech with a proven market
How is Sage able to achieve such results? It’s fairly straightforward in my view. Sage has identified a target market with a clear, recurring need that a tech solution can help meet.
The market in question is accounting software for small and medium-sized businesses. There are millions of such firms and they need to do the books year after year. Software can help, but small and medium-sized companies won’t typically pay for the expensive solutions designed for massive corporations.
By aiming at this market, Sage has been able to capture a sizeable customer base. Software like this tends to be sticky – once a company is accustomed to using it and staff are trained on it, the switching costs increase. So customers are likely to keep using a given solution, which gives a supplier like Sage pricing power.
Is Sage among the best shares to buy now?
But Sage isn’t the only company to have realised this. There are competitors, and one of the key risks to Sage is losing market share to competitors that may undercut it on price or have a better product.
Despite that, I continue to rate Sage among the best shares to buy now for my portfolio. Its clear, focussed strategy has proven successful and I expect it to continue doing well. Its large installed customer base is an asset which helps underpin future profits. I also like its financial discipline, something I think has been demonstrated by its consistently applied dividend policy.
Sage share price risks
There are risks with Sage, though. A shift to a cloud model has annoyed some customers, which could lead to revenue falls. With its significant international sales, there is an ongoing risk that Brexit may hurt profitability in some markets.
