The US gets all the big headlines when it comes to tech stocks. But although it’s true that there are no £1tn UK tech stocks, I believe we do have some quality tech firms that deserve a share of our hard-earned cash.
Today, I’m looking at three tech shares I rate as buys in the current market. All three have generated above-average returns and paid rising dividends in recent years.
Tech stock #1: lifetime growth
Many tech business models are built around the idea of recurring income. Rather than selling a product once, they aim to build up a loyal subscriber base who pay regular fees for many years. This approach tends to deliver steady profit growth over time, supporting a rising share price and dividend growth.
A good example is accountancy software firm Sage (LSE: SGE). This business floated on the London market back in 1989. It’s since grown into an £8bn FTSE 100 company with sales of nearly £2bn each year.
If you’re looking for a reliable tech stock with long-term growth potential, I think Sage ticks all the boxes.
During the first half of this year, 88% of the group’s revenue was recurring. The group’s balance sheet carries very little debt and its operating profit margin of 23% supports strong cash generation.
Investors have to pay 27 times forecast earnings to buy the shares. That’s not cheap. But the shares do offer a 2.3% dividend yield. They also give you access to a world-class software business. I rate Sage as a buy.
Tech stock #2: essential security
FTSE 250 tech stock Avast (LSE: AVST) is best known for its anti-virus software. The group claims to have more than 400m global users and to prevent 1.5bn attacks every month.
Avast’s business model is built around offering a free basic service with paid-for extra software and services. It’s a model that seems to work well. Avast’s share price has doubled over the last two year, while its profits have risen steadily.
The business hasn’t been affected by Covid-19 either. During the first half of 2020, underlying profits rose by 14.6% to $170m.
In my view, Avast’s high profit margins and growth potential justify its price tag of 21 times 2020 forecast earnings. As with Sage, there’s a useful 2.1% dividend yield. I’d be happy to tuck away some Avast stock at current prices.
Tech stock #3: price comparison pays
You’re probably familiar with Moneysupermarket.com Group (LSE: MONY) from its television advertising and website. But you might not realise just how profitable this business is.
Last year, Moneysupermarket generated an operating profit margin of 30% and a return on capital employed of 48%. What this means is that the business generated £480 of profit for every £1,000 of capital invested. These are impressive figures and they aren’t a one-off — these numbers have been fairly consistent for years.
The group’s weakness in recent years has been its lack of growth. However, the firm is investing in new services and technology and I believe growth will follow. City analysts seem to agree — they’re forecasting 20% earnings growth in 2020. I reckon Moneysupermarket offers decent long-term value at the moment, with a dividend yield of 3.7% and a P/E of 21.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Moneysupermarket.com and 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.