This FTSE 100 share isn’t cheap. But it’s one of the first stocks I’d buy for a portfolio today

Right now, there are plenty of cheap stocks within the FTSE 100 index. However, when it comes to picking stocks, valuation isn’t the be-all and end-all.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »