2018 has so far proven to be a year to forget for The Sage Group (LSE: SGE). As fears of stalling sales have bashed investor confidence, the accounting software specialist’s share price has taken a hammering, falling by almost a fifth since the turn of January.
I’ve always kept the faith, however, arguing that Sage’s decision to switch to a subscription-based model should lay the foundation for handsome earnings growth in the years ahead. And my confidence has been bolstered by the company’s much-improved trading statement of recent sessions.
In the period spanning April-June, group organic revenues had risen to 6.8%, speeding up from average growth of 6.3% in the prior six months.
Investors reacted badly to news in the spring that the FTSE 100 firm was downgrading its organic sales guidance for the full year ending September 2018 to 7% from 8%, but signs of improving trading in France and the UK, and continued robustness in its North American marketplace, mean that the company can now start looking up again instead of down.
More dividend growth expected
The latest release vindicated City analysts’ forecasts that Sage should report earnings growth of 9% in both fiscal 2018 and 2019. This means that the software star is also in great shape to keep lifting its dividends.
The Square Mile is anticipating that last year’s 15.42p per share reward will shuffle to 16.7p in the present period and again to 17.9p next year.
Now subsequent yields of 2.5% and 2.7% may be solid rather than spectacular, but the chances of profits and payouts continuing to sprint higher long after this period convince me that it could help many an investor to retire early. This makes Sage more than worthy of its elevated premium, in my opinion, a forward P/E ratio of 20.1 times.
Share pickers scouring the Footsie for classically-considered value stocks — that is, companies with prospective P/E multiples of 15 times or below — may also be minded to give Croda International (LSE: CRDA) a wide berth on account of its own princely valuation, in this case a multiple of 27.2 times.
As in the case of Sage, however, I reckon long-term investors need to look past this heady reading and consider the exceptional sales progress the chemicals company is making. Organic sales across its core business swept 4.7% higher between January and June, suggesting that such turnover jumped 5.4% in the second quarter versus 4% in the prior three-month period.
City brokers are expecting earnings to fire 6% higher in 2018 and 8% higher next year, stable figures that keep hopes of further dividend progression very much alive. 2016’s reward of 81p per share is predicted to move to 88p this year and again to 97.4p in 2019.
Investors should not dwell on marginal yields of 1.7% and 1.9% for these years but instead at the rate Croda is likely to continue raising dividends as demand for its chemicals takes off.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.