The Sage Group (LSE: SGE) share price climbed 13% at one point on 22 November on full-year results and the news of a new share buyback.
The firm, which provides business software, has been one of the FTSE 100 winners of the past five years, up 96%.
Cash returns
The key for me is that share buyback.
Sage plans to spend up to £350m to buy back its own shares. And that’s a fair chunk — about 3% of the total market cap.
Is it the best way to return surplus cash to shareholders, though?
For stocks on very low valuations, I’d tend to say yes. But these results put Sage on a price-to-earnings (P/E) ratio of 35.
Broker forecasts show it dropping a bit in the next two years as the tipsters expect earnings to grow, but not by much.
What about dividends?
Sage lifted its dividend too, by 5% to 19.3p per share. That’s a small rise in a year of high inflation, and it yields only 1.7%.
Might it have been more helpful for shareholders if it had raised the dividend a bit more, and put less into the buyback?
I guess I’m biased, as I mostly go for income stocks. And maybe I’d prefer to see more signs of long-term dividend growth.
Still, judging by the Sage share price on the day, investors seem happy enough.
Double-digit growth
And the cash is there to support it.
Annualised recurring revenue, a good measure of sustainable income, rose by 11%
And with a strong operating margin of 20.9%, underlying operating profit gained 18%. Underlying earnings per share rose 22%.
Sage ended the year with £1.3bn in cash and available liquidity, and a net-debt-to-EBITDA ratio of just 1 times.
Sage looks like a cash cow, if ever I saw one.
Artificial what?
I find one thing both a bit exciting and a bit scary.
CEO Steve Hare, while pointing out the good things, spoke of “AI-powered services to customers“.
Now, artificial Intelligence (AI) surely has great potential, of that I have no doubt. But it’s in the news almost every day. And it’s among the most fashionable buzzwords of 2023.
Just mention AI, and investors can fall over each other racing for the ‘Buy’ button.
Look at the boom and bust at RC365 Holding this year to see the effect it can have. I’ve no idea if that stock is a good long-term buy, but it sure caused much gnashing of teeth this year.
The growth balance
What’s my bottom line on the Sage share price now? It’s all about the balance between growth potential and risk.
Sage has a good defensive nature, and once customers have committed themselves to its software, they tend to stick.
But the risk is all in the valuation, with P/E ratios over 30 and about double the long-term FTSE 100 average.
It’s not my kind of buy, but I can’t help thinking it could continue as a long-term growth stock winner.
