Sage Group‘s (LSE: SGE) one of the most impressive growth shares on the entire FTSE 100. Its share price is up 20% over 12 months and 80% over five years, despite the wider economic turbulence.
I first considered buying it two years ago while building my Self-Invested Personal Pension (SIPP). On 16 June 2023, I noted on these pages that the shares had surged almost 50% in a year and were trading at a 22-year high.
Sage’s on a roll
The business was moving into a new phase, rolling out cloud-based services to small- and mid-sized firms worldwide, including rapid expansion in the US.
There was a big question over whether artificial intelligence (AI) would disrupt its business or accelerate it. I hoped for the latter.
What stopped me from buying? The valuation. Sage was trading at a price-to-earnings (P/E) ratio of 34, far higher than the then-FTSE 100 average of 9.9. The 2.1% yield didn’t excite me either.
I fancied myself a contrarian back then and bought troubled mining giant Glencore instead. It’s down 38% in the last year. Bad choice.
That has made me rethink the value of momentum.
Still delivering the goods
Sage’s half-year results on 15 May showed underlying operating profit up an impressive 16% to £288m. Margins improved sharply, helped by cost discipline and growing demand for its software. Underlying basic earnings per share rose 17% to 20.8p.
The group reported strong cash performance too, with 115% underlying cash conversion. It now holds £1.2bn in cash, putting it on a robust financial footing. The board felt comfortable extending its share buyback programme by up to £200m.
Inevitably, Sage still looks pricey today, trading at 32.5 times earnings. But as recent results show, sometimes it’s worth paying a premium price.
The yield’s dipped to 1.66% but a closer look suggests that this is a better passive income stock than I originally realised. In fact, it’s a dividend superstar, lifting its dividend every year since 1988. That’s a run now stretching 37 years.
Lately, the pace has slowed. Over 15 years, shareholder payouts grew at an average annual compound rate of 7.08%. That slips to 5.34% over 10 years and 4.21% over five (although the pandemic played a part there).
Management’s picking up the pace. In 2024, it hiked the final dividend by 5.96% to 20.45p. And on 15 May, it lifted the interim payout 7%, in line with its “progressive policy”.
Valuation call
Some analysts think the shares have gone as far as they can. Of the 20 tracking the stock, only eight call it a Strong Buy, with eight more saying Hold. To my surprise, two name it a Strong Sell. I don’t share that point of view.
But the median 12-month price target sits at 1,374p – up 11.4% from today. That’s the kind of steady growth I’d like to see. Forecasts are just educated guesses, of course.
I’ve passed on Sage for being too expensive, but sometimes as I said, we have to pay for quality. This is a top growth stock and I think it’s worth considering buying today.
