This FTSE 100 tech share jumped 19% this morning! Here’s why

It is easy to complain about the dearth of large tech shares listed in London compared to New York. But there are some companies on this side of the pond that have proven they have what it takes to make it in the sometimes highly competitive tech world.

One jumped 19% in early trading today (20 November) after the market digested its latest annual results, which showed a 55% growth in basic earnings per share.

Simple but proven business model

The share in question is accounting software specialist Sage (LSE: SGE).

Sage’s business model is fairly simple but has been profitable over the course of decades. It helps small- and medium-sized businesses manage their accounting products, thanks to a suite of software products and services.

I like that as a market and also as a model. The demand is high and likely to remain that way. The service is ‘sticky‘, meaning that once firms have got used to using Sage and their staff feel comfortable with it, there is inconvenience and a time cost in switching to rivals.

That helps give Sage pricing power, as was apparent in last year’s performance. Revenue grew 7% to £2.3bn. Profit after tax leapt 53% to £323m. That means the company’s net profit margin came in at 13.9%.

Long-term dividend growth

That profit after tax more than covers the annual dividend, even after a proposed increase of 6%. Indeed, the company feels so flush it also announced plans for a share buyback of up to £400m. Given the current share price (up 75% from early last year), I personally do not see that as a great use of spare cash.

Sage has a progressive dividend policy, meaning it aims to grow its payout per share annually. It has already done so for many years and, as its business model continues to be highly cash generative, I expect that if things go smoothly it will keep doing so.

Still, while I like the growth prospects, I am less excited about the yield. That currently stands at 1.5%. If the dividend per share kept growing at the 6% achieved last year, it would take around 14 years for the yield simply to come in line with the current FTSE 100 average (presuming a flat share price).

Strong business, high valuation

Nor do I think the shares offer me compelling value at the moment. As the sharp movement in profits last year demonstrates, this is not a business that is immune from significant volatility. Risks I see on the horizon include the flipside of one of the business’s opportunities, namely scaling up.

Doing that successfully could help grow revenues ahead of costs, boosting profit margins. But a misstep, for example misunderstanding the differences between specific markets, could be costly.

On balance though, I continue to see this as an excellent company with strong prospects. But it has a chunky tech share price valuation attached. The £13bn market capitalisation may look cheap by some US standards — but it is too costly for my tastes.

The post This FTSE 100 tech share jumped 19% this morning! Here’s why appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group Plc. 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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