Fund managers Terry Smith and Nick Train are two of the UK’s most talented stock pickers. Just look at their performance track records. Over the last five years, Smith’s Fundsmith Equity fund has delivered a return of around 150%, while Train’s Lindsell Train UK Equity fund is up around 94%, versus a total return of around 38% for the FTSE 100 index.
Clearly, these guys are good at what they do. With that in mind, I want to highlight one FTSE 100 stock both fund managers own.
Sage
Sage (LSE: SGE) is a technology company that helps businesses manage everything from money to people. Its key product, Sage Business Cloud, is a suite of cloud-based accounting and payroll products aimed at small- and medium-sized companies, as well as the self-employed. Currently, the group serves 3m customers in 26 countries with just over half of group revenue coming from Europe, and a third from the US. The stock, which has a current market capitalisation of £7.7bn is held in both Fundsmith and the Lindsell Train UK Equity fund.
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Buffett-style business
Given that both Smith and Train focus on ‘quality’ stocks, like Warren Buffett, it’s easy to see why they like Sage as an investment. Just look at some of its quality attributes:
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It’s a highly profitable company that has strong operating margins and a high return on capital employed (ROCE). Over the last three years, operating margin has averaged 20.7%, while ROCE has averaged 16.9%.
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It has a great track record of increasing revenues and profits and generating shareholder wealth. Over the last five years, the group’s top line has increased 34%.
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Recurring revenue is high. Once businesses sign up for Sage’s solutions, they’re unlikely to switch to another provider as that would involve a lot of hassle and costs.
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The company has an excellent dividend growth track record and has increased its dividend payout every year over the last decade.
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Debt is low. At 31 March, the group’s net debt to EBITDA ratio was 0.8.
Overall, it’s very much a Buffett-style business.
Growth story
There’s also an attractive growth story. Overall, Sage believes its market is growing at 7% per year and that cloud spending is increasing by 13% per year. Worldwide, it believes its total addressable market is over 70m businesses, which suggests there should be plenty of opportunities for the group in the years ahead. Interestingly, in a recent interview, Nick Train said that he’s hoping the Sage growth story “is only just getting started.”
Priced to buy
Are Sage shares priced to right now? In my view, yes they are. For the year ending 30 September 2020, analysts expect the group to generate earnings per share of 31.6p, which puts the stock on a forward-looking P/E of 22.5. That may not be a bargain valuation. However, for a company with Sage’s track record and quality attributes, I see it as quite reasonable. A prospective dividend yield of around 2.5% adds weight to the investment case.
Overall, I see Sage as a great dividend stock to buy and hold for the long term.
