2 Footsie giants I’d avoid at all costs!

Bilaal Mohamed explains why cautious investors should think twice before buying these two Footsie giants.

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Today I’ll be discussing the outlook for enterprise software giant Sage and international support services group DCC. After a strong rally this year, are these FTSE 100 blue chips simply too expensive for new investors?

Cyber attack

Multinational software giant Sage Group (LSE: SGE) has a long history of steady growth and is seen as a relatively defensive company that provides sustainable and reliable dividend increases each and every year. But this year’s rally has meant that new investors won’t be reaping the same rewards as long-term shareholders as the higher share price converts into lower dividend yields. Can the effects of a higher share price really be offset by the expected improvements to the dividend payouts over the next few years?

Shares in the Newcastle-based firm have soared to 746p during the course of the year, a level not seen since the dotcom crash at the start of the millennium. Not even the cyber-attack reported last month was able to halt the upward march of the shares after the company revealed last month that it had been the victim of a data breach where unauthorised access had been gained to customer data using an internal log-in. Despite an early sell-off the morning after the news, the shares had fully recovered by the end of the trading day as investors piled-in to take advantage of the weakened share price.

Sage completes its financial year at the end of the month, and although full-year results aren’t due until 30 November, analysts are expecting the firm to report a 9% rise in earnings for the year, with another 14% improvement pencilled-in for fiscal 2018. But this level of growth doesn’t fully justify the high forward earnings multiple of 27, and the expected 7% rise in the full-year dividend payout still leaves the shares supporting a yield below 2%.

Slowdown in growth

Another FTSE 100 firm that has enjoyed a significant share price rally this year is support services group DCC (LSE: DCC). The company has an excellent track record of revenue and earnings growth mirrored by increases in its share price and dividend payouts. The Irish distribution and outsourcing group expects FY2017 to be another year of profit growth and development and says it doesn’t expect the UK’s decision to leave the European Union to have a significant impact on its business as it has relatively little cross-border trade.

According to consensus forecasts, the Dublin-based group should see a slowdown in the rate of growth over the next couple of years with estimates suggesting an 11% rise in profits to £253m for the current financial year, followed by a much smaller 4% increase to £263m the following year. This year’s rally has seen the share price soar by 38%, and has consequently shrunk the dividend yield to just 1.5%. In my view, DCC is beginning to look overvalued at 24 times forecast earnings for the year to the end of March 2017.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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