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ITV and Sage: 2 shares to buy now?

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I’m always on the lookout for new shares to buy for my portfolio. I’m also open to the idea of investing more in a stock I already own if I’m happy with recent progress.

Today I’m looking at one share of each type. ITV (LSE: ITV) is already a mid-sized holding in my portfolio. Meanwhile, software group Sage (LSE: SGE) is a top contender to be the next share that I buy.

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“Encouraging signs” at ITV

ITV’s last trading update covered the nine months to 30 September. At the time, CEO Carolyn McCall reported “encouraging signs” of recovery in the group’s businesses. Advertising sales during the fourth quarter were slightly ahead of the same period in 2019. Meanwhile, 85% of television productions that were paused due to Covid-19 had been completed or were back in production.

Good news on vaccines provided another shot in the arm for ITV’s share price. The stock has now risen by more than 40% since the start of November.

However, ITV shares are still worth around 40% less than they were a year ago. I think there are some good reasons for this.

What could go wrong?

In my view, ITV still faces some significant risks.

The first is that the business still depends quite heavily on revenue from traditional television advertising. Some people believe that conventional ad-funded television will continue to decline, as viewers switch to streaming services and ad spending moves online.

The second big risk is even more fundamental. Will scheduled television even exist in a few years’ time, or will everything be watched on demand? I don’t know.

ITV is working hard to adapt to changing market conditions. The company has scaled up its production business, ITV Studios, which sells programmes to other television companies. ITV also has its own streaming services, ITV Hub and BritBox.

I’m optimistic. On balance, I would consider buying more ITV shares for my portfolio today. But the group’s turnaround isn’t a done deal — I think some risks remain.

Sage: my next share to buy?

The UK doesn’t have many big tech stocks. But FTSE 100 accountancy software firm Sage is a rare success story. The group’s history can be traced back to the 1980s, but today Sage is a £7bn business with sales of nearly £2bn each year.

Sage’s operating profit margin has averaged 20% over the last five years. Cash generation is good and debt levels are low. I think it’s an attractive business, but growth has slowed. Pre-tax profit fell in 2019, and 2020 profits were also lower than in 2018.

In my view, this business faces two main challenges. The first is to maintain growth against fast-moving online rivals. The second is to persuade its own customers to switch from traditional software to Sage’s online subscription services.

The pandemic caused some disruption last year, but Sage’s latest trading update shows a 5% rise in recurring revenue during the final quarter of 2020. This was enough to offset the decline in traditional software sales during the same period.

I feel reassured by this continued progress and expect Sage to remain successful. The shares have fallen in recent months, but Sage is on my list of shares to buy for my long-term dividend growth portfolio.

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Roland Head owns shares of ITV. The Motley Fool UK has recommended ITV 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.

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