Around six years ago, I bought some shares in FTSE 100 software company Sage (LSE: SGE). Since I bought, the shares have risen about 85%, meaning that I’m well up on my initial purchase price. I have no intention of banking my profits any time soon though. In my view, this stock has the potential to reward me with attractive returns for many years to come.
13% per year
While not life-changing, I’m very happy with my returns from Sage shares. An 85% gain over six years translates to a return of about 11% per year. Add in dividends received (the yield on the stock has hovered around the 2% mark over the last six years) and I’ve picked up total returns of about 13% per year. To put that in perspective, the FTSE 100 index has delivered total returns of around 7% per year over the same period, so I’ve outperformed the market by a wide margin.
That kind of above-average return is exactly what I’m looking for when I buy shares. By picking individual stocks for my portfolio, I hope to beat the market over the long run and build more wealth for the future. Of course, not every stock is going to perform this well. But I figure that if I can put together a solid portfolio of high-quality companies like Sage, I should do quite well in the long run.
Potential from here
Looking ahead, I reckon Sage shares can continue to deliver for me. There are a few reasons why.
For a start, it’s well placed to benefit from the digital transformation trend. As small and medium-sized companies move to get their accounting systems up-to-speed digitally, demand for its solutions should rise.
Secondly, software companies like Sage are typically able to raise their prices without experiencing high levels of customer churn (the cost of moving to another provider typically outweighs the cost of the price increase). As the company raises its prices, its revenues and earnings should climb.
Additionally, earnings should get a boost from share buybacks. Recently, Sage has been buying back quite a bit of stock.
As for the valuation, the price-to-earnings (P/E) ratio is only 25.6 looking at the earnings forecast for next financial year (which begins in October). That’s relatively undemanding (for a software company) and I think we could see some multiple expansion at some point.
Finally, there’s the dividend yield, which currently stands at around 1.8%. That’s a nice little bonus.
I’m bullish
Of course, there are no guarantees that Sage will continue to be a good investment for me. If the global economy crashed and businesses stopped spending on technology, the growth story could be derailed.
Taking a five-year view, however, I’m bullish on the stock. I think it’s worth considering for the long term today.
