Right now, there are plenty of cheap shares within the FTSE 100 index. However, when it comes to picking stocks, valuation isn’t the be-all and end-all. Often, it’s the high-quality stocks that are a little bit more expensive than turn out to be the best long-term investments.
With that in mind, today I want to highlight a high-quality FTSE 100 stock that I believe has the potential to be a super investment in the long run. This stock isn’t cheap. However, it’s a proven performer with an attractive long-term growth story. If I was putting together a portfolio today, this stock would be one of the first stocks I’d buy.
A FTSE 100 stock built for the digital age
The FTSE 100 stock I’m referring to is Sage (LSE: SGE). It’s a technology company that specialises in cloud-based accounting and payroll solutions. Its products and services are designed to help companies become more productive and efficient.
The reason I like Sage is that I see it as well-positioned to succeed in a world that is becoming increasingly digital.
Covid-19 disruption has shown just how important it is for businesses to be truly digital. Generally speaking, those that have already transformed themselves digitally (remote working capabilities, automation of basic manual tasks, data stored in the cloud) have been able to navigate this crisis. Those that have not, however, have suffered.
Looking ahead, I expect many more businesses to embrace cloud technology and this should benefit Sage.
Solid results and a dividend increase
Sage issued a relatively solid (considering the economic conditions) set of half-year results last week. Organic total revenue was up 5.7% while underlying operating profit increased 0.9%.
It’s worth pointing out that Sage increased its half-year dividend by 2.5% to 5.93p per share. That says something about the quality of this company. Recently, a wide range of FTSE 100 companies have either cut or suspended their dividend payouts. Assuming a similar 2.5% increase for the final dividend, the prospective yield on offer is about 2.7%.
Sage also advised that it has a “resilient” balance sheet with around £1.3bn of cash and available liquidity, and a net-debt-to-EBITDA ratio of 0.5. “With Sage’s focus on high-quality recurring and subscription-based revenues, and strong liquidity position, the group has entered the Covid-19 pandemic in a strong operational and financial position,” it said.
Held by Terry Smith and Nick Train
Of course, there are risks to the investment case. A major recession could send many of Sage’s customers out of business. It also faces competition from the likes of Intuit and Xero.
However, weighing everything up, I see the investment case as highly attractive. And I’m not the only one. Sage is a favourite of both Terry Smith and Nick Train – two of the UK’s top stock pickers.
Sage shares currently trade on a forward-looking P/E ratio of 23.5. That’s not exactly cheap. But this is a high-quality company with a great track record and plenty of potential for growth.
I’d buy the stock today while it’s well below its 52-week highs.
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Edward Sheldon owns shares in Sage. The Motley Fool UK owns shares of and has recommended Intuit. 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.