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It's easy to complain about the dearth of big tech stocks listed in London compared to New York. But there are some companies on this side of the pond that have proven they have what it takes to succeed in the sometimes highly competitive world of technology.
One jumped 19% in early trading today (Nov. 20) after the market digested its latest annual results, which showed 55% growth in core earnings per share.
Simple but proven business model
The stock in question is an accounting software specialist. Sage (LSE: SGE).
Sage's business model is quite simple but has been profitable over decades. Helps small and medium-sized businesses manage their accounting products, thanks to a suite of software products and services.
I like that as a market and also as a model. Demand is high and is likely to remain so. The service is 'clingy', meaning that once businesses have become accustomed to using Sage and their staff are comfortable with it, there are drawbacks and a time cost in switching to rivals.
That helps give Sage pricing power, as was evident in last year's performance. Revenue grew 7% to £2.3bn. Profit after tax rose 53% to £323m. This means that the company's net profit margin was 13.9%.
Long-term dividend growth
That after-tax profit more than covers the annual dividend, even after a proposed 6% increase. In fact, the company is so happy that it also announced plans for a share buyback of up to £400m. Given the current share price (up 75% from early last year), I personally don't see this as a great use of excess cash.
Sage has a progressive dividend policy, meaning it aims to increase its payout per share annually. It has already done this for many years and, given that its business model continues to generate a lot of cash, I expect that, if all goes well, it will continue to do so.
Still, while I like the growth prospects, I'm less enthusiastic about the performance. Currently, that figure stands at 1.5%. If the dividend per share continued to grow at the 6% achieved last year, it would take around 14 years for the yield to simply align with the current FTSE 100 average (assuming a stable share price).
Strong business, high valuation
I also don't think the shares offer me compelling value at this point. As evidenced by the strong earnings movement last year, this is not a business immune to significant volatility. The risks I see on the horizon include the other side of one of the business opportunities: scaling.
Doing so successfully could help increase revenue before costs, increasing profit margins. But a misstep, such as not understanding the differences between specific markets, could prove costly.
However, at the end of the day, I still consider this to be an excellent company with strong prospects. But it has a strong valuation attached to the price of technology stocks. The £13bn market cap may look cheap by some US standards, but it's too expensive for my taste.
