Stock Analysis

Sage Group Plc – European Dividend Aristocrat entering the Noble 30

Sage Group Plc

Sage Group Plc ($LON:SGE) is entering the Noble 30 index as a pure-play European dividend aristocrat with 33 years of consecutive dividend growth. It is a company which I initially overlooked, but this is why I love the community so much, because Daniel brought it to my attention earlier this year in the summer.

To be honest, I don’t add companies just like that to the Noble 30. First of all I want to do my own due diligence to check if it’s indeed a valid candidate to enter the index. Secondly I prefer to make changes only once a quarter so that we limit the amount of ad-hoc changes and maintenance.

Having said that, Sage Group Plc ticks all the boxes, because it has not cut their dividend since the Great Recession and it has a market cap above 5 billion Euro (7.1 Bln).

Sage Group Plc replaces Sodexo SA

In this particular case the company is replacing Sodexo SA which announced a full dividend cut on the 29th of October when publishing their fiscal 2020 numbers.

Sodexo SA is leaving the index after at least 24 years of stable and growing dividends.

Unfortunately the company couldn’t weather this storm from a dividend perspective and that’s no surprise. Covid-19 doesn’t negotiate and couldn’t care less about a companies impact due to lockdowns and such.

The below revenues statement by segment explains it all, because HY 2020 was running from March until the end of August. This is exactly the period when covid-19 started to impact Europe and the United States and you can see that it resulted in a drop of 27.5% in Total Group revenue.

FY 2020 results
Page 13 – Press Release FY2020 numbers – Sodexo SA

So there we have it. That’s the reason Sodexo’s out. Nothing more, nothing less.

Having said that, let’s have a brief look at Sage Group Plc as a replacement for Sodexo.

Brief introduction of Sage Group Plc

Sage Group Plc is an enterprise software company with its headquarter located in Newcastle, United Kingdom. The company was founded in 1981 by David Goldman, Paul Muller and Graham Wylie.

The company grew really quick and in 1988 it entered the North-American market via the acquisition of PeachTree. This was also the moment where the history really started as a listed company.

Sage Group Plc price charts and key ratios
source: Yahoo Finance

And as you can see, it had quite a run up during the late nineties during the internet bubble. It has yet to reach their all-time highs 20 years later.

Sage Group Plc is quite a global player with locations in 23 countries. The company is particularly known for its enterprise resource planning software, but it’s not the industry leader. This place is occupied by SAP and Oracle.

We can actually say that the company lost quite its mojo over the recent years and this has been reflected in the share price, because it went almost nowhere in the last 5 years.

It’s not that the underlying numbers are that bad. They have been able to transition quite some customers to the cloud and their renewal rates are very high.

However, last week they also reported their fiscal 2020 results and the stock price reacted with a 14% immediate drop. This is similar to what we’ve seen with SAP a few weeks ago. The reason for this is a steep decline of 26% in non-subscription revenue and a 17 Million Gbp expected bad debt provision related to the pandemic.

I personally think that Sage will keep struggling a bit going forward until it has fully transitioned its portfolio into subscription services only. Their profit margins are under pressure and this will have to stabilize first so that the impact of revenue growth will be reflected in growth in their earning per share numbers.

Sage Group Plc Dividend History facts

So let’s look into their Dividend history then, because this surely must be impressive to get included in the Noble 30 index πŸ˜‰

Let’s just start with their dividend growth history chart.

Sage Group plc dividend history
Sage Group Plc – Dividend History

The impressive thing about Sage Group’s dividend history is the fact that it always increased their dividend since 1988 (33 consecutive years). There was not 1 year where they have frozen their dividend and this is really unique for a European company.

DecadeAverage Dividend Growth %
2011 – 20205,87%
2001 – 201033,77%
1991 – 20009,14%
Sage Group Plc Dividend Growth Rate per Decade

But as you can see, more recently the company started to grow it’s dividend quicker than it’s earnings per share. This has resulted in a payout ratio which is hovering between 50% and more recently 75% over the last decade.

What is important to know is that these are IFRS EPS numbers. There seems to be a continuous gap between their basic EPS numbers and their IFRS EPS numbers. The gap has actually averaged 17.5% over the last 10 years, so please be conscious of that when analyzing their financial statements.

Having said that, the stock currently yields 2.86% with a 5 year dividend growth rate of 4.04% and the latest increase of 2.01%. I think that these numbers speak for itself and it’s a clear sign of a company having headwinds.

I always find this interesting, because if I read their FY 2020 presentation then it’s again a typical good news show.

Sage Group Plc Fundamentals

Recently I started to appreciate more and more Dividend Wave’s one-pagers and EloySnowball’s tables, because they give a quick overview on a company’s fundamentals.

They have definitely inspired me to create something similar as a quick snapshot and below are the numbers which I’m typically interested in.

Sage Group Plc fundamentals
Sage Group Plc – Quick snapshot fundamentals

As you can see, from a fundamental point of view the company is in a pretty good position when purely looking at their numbers.

Their balance sheet seems strong and this is evident when seeing 848 Million of cash and cash equivalents on there. I would say that they have enough firing power to keep continuing adding new acquisitions to their portfolio.

To sum it up: I see no red flags in their current fundamentals. This means that the company is in a pretty good situation to continue a path of growth once they get rid of their “legacy” while pivoting into a subscription based revenue model.

Needless to say, it starts off course with excellent user experience for their software products including optimal pricing. I have no idea about Sage Group Plc software products, so I would love to hear your comments about it. Are they more like “old-style” as SAP SE or is their product line more like Workday?

My thoughts about the stock

It’s really nice to see another Information Technology stock entering the Noble 30 index. It’s also a company with 33 years of consecutive dividend growth which gives it a 7th place in the list. That’s quite a nice entry and I still wonder how I have been able to overlook this stock.

Personally I would like to not own this stock yet at this valuation. I would rather like to see a P/E of 15 (compared to ~22) for a company with flat EPS and struggles in pivoting towards a full revenue subscription model.

Neither would I feel comfortable building out a position in this stock without having experienced some of their products myself. I would really need to do some more homework by watching videos and speaking to users to get an understanding of their user experience.

I know what both SAP and Workday have to offer and both are far from perfect. However, there’s still a significant difference noticeable between the two of them and I rank Workday much higher in that regard.

Having said that, let’s welcome Sage Group Plc into the Noble 30 index and let’s wish them a very long membership which will last for years to come.

Next Steps

Later this weekend I will update all the Noble 30 related lists and statistics on this blog after the inclusion of Sage Group Plc.

I will also update the Trading 212 Noble 30 Pie, so that in the upcoming months the Sage Group Plc will be purchased as part of my monthly contribution.

I do invest monthly in the noble 30 pie which means that I will sell my shares in Sodexo and use the cash to replace them with shares in Sage Group Plc.

Last but not least, Siemens also cut its dividend by 13% the other day. I will let you know soon by whom the company will be replaced, so stay tuned!

Yours Truly,

European Dividend Growth Investor


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Disclaimer

I’m not a certified financial planner/advisor nor a certified financial analyst nor an economist nor a CPA nor an accountant nor a lawyer. I’m not a finance professional through formal education. I’m a person who believes and takes pride in a sense of freedom, satisfaction, fulfillment and empowerment that I get from being financially competent and being conscious managing my personal money. The contents on this blog are for informational and entertainment purposes only and does not constitute financial, accounting, or legal advice. I can’t promise that the information shared on my blog is appropriate for you or anyone else. By reading this blog, you agree to hold me harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information provided on this blog.

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It's my desire to retire early via Dividend Growth Investing as a passive income stream. This is not easy and especially when living in Europe. That's why I started this blog and share my journey: to give you a European perspective.

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Andrea
Andrea
8 months ago

I took a look at Sage’s products for a client. Unfortunately, though it’s got excellent support for physical businesses which need inventory, job costing etc – functions which many accounting software packages lack – it looks very dated, and doesn’t perform well in terms of handling ACH and digital payments. This has become a very competitive space. Sage used to be a gateway product, but now most larger start-ups head for a full ERP like Oracle Netsuite or SAP, and smaller start-ups either use QuickBooks, Freshbooks or one of the freemium packages. I hope Sage gets its act together, but… Read more »

Mark
Mark
7 months ago

Personally think the payout ratio trend is very concerning – going from the left bottom to the right top, meaning that dividend growth is not accompanied by EPS growth. I think in general these transition stories are very difficult to buy into as there are simply more agile cloud native competitors out there that are taking share and the cloud transition is actually a trigger point for the very sticky customer base of Sage/SAP to start looking around and churn to more modern alternatives. It is a multi-year revenue and margin headwind which does not bode well for either share… Read more »

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