The third quarter didn’t prove to be a period to remember for The Sage Group (LSE: SGE) and, more specifically, it’s share price.
The accounting software specialist shed 14% of its value in the three months to September, a downtrend chiefly due to a post-update sell-off in July. Back then, Sage declared it expected organic operating profit margins to be “at the lower end” of guidance of between 23% and 25%.
I can’t help but think that the scale of investor selling has been more than a tad excessive, however. Indeed, there was plenty of encouraging news to come out of the FTSE 100 firm through its midsummer statement. Group organic revenues were up 5.9% in the first nine months and recurring revenues up 10.6%, the latter underpinned by ripping software subscription growth (up 28.3% year-on-year).
That impressive growth rate vindicates Sage’s decision to move to a cloud-based model, and so strong has been uptake from new customers and migration of existing clients to the cloud that the business upped its recurring revenue target. Sage said in July it expects such sales to “slightly exceed” its full-year target of between 8% and 9%.
Everything isn’t as quite as peachy over at the tech giant though, and there’s some concern over how sharp sales of its software and software-related services (SSRS) are contracting (these tanked 15.5% between January and September). The rate of decline here may have exceeded expectations, sure, but this was to be expected as Sage refocused its model towards subscriptions. This turbulence certainly shouldn’t overshadow the overall investment case. The company’s move to supply next-gen IT services still creates a bright long-term profits picture.
A great dividend grower
City analysts seem to agree with my optimistic take and expect the Footsie firm to rebound from an anticipated 9% earnings dip in the year ended September with an 8% increase in the new period. And this leads to predictions that Sage — which has raised dividends by mid-to-high single digits consistently in recent years — to remain a generous payout raiser too.
Last year’s 16.5p per share total dividend is expected to be hiked to 17p in the period just passed and again to 17.6p in fiscal 2020, the latter resulting in an inflation-beating yield of 2.5%. Such a figure may be put in the shade by many of the bigger yielders on the FTSE 100, though there’s plenty out there in danger of shocking share pickers by freezing or even cutting their prospective dividends.
There’s no such worries to be had with Sage, its goal to keep raising dividends supported by the eye-popping rate at which it generates cash. Free cash flow boomed to £257m in the first half of fiscal 2019, from £157m a year earlier.
In fact, I can’t help but think dividends this year might blast past these predictions given Sage’s solid earnings outlook and the might of its balance sheet. While a forward P/E ratio of 23.4 times isn’t exactly cheap on paper, I reckon the recent share price retracement from 19-year highs represents a brilliant buying opportunity.
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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.