Can Sage's Rising Dividend Beat the FTSE?
LONDON -- The last few years have been tough for investors relying on the FTSE 100 (INDEX: ^FTSE) to deliver a rising dividend payout.
Looking at the iShares FTSE 100 ETF (ISE: ISF.L) , an exchange-traded fund that tracks the benchmark index, we can see that the aggregate payment from Britain's top 100 companies has yet to regain its prerecession peak:
Dividend per Share (pence)
But there are companies that have managed to deliver a rising dividend throughout the last five years despite the terrible macroeconomic environment. One such name is Sage (ISE: SGE.L) , ranked 76th in London's premier FTSE 100 index.
Sage supplies small- and medium-sized enterprises around the world with financial-management computer software and support services. With the shares at 285 pence, the market cap is 3.6 billion pounds. This table summarizes Sage's financial record:
Sales (millions of pounds)
Operational Cash Flow (millions of pounds)
Earnings per Share (pence)
Dividend per Share (pence)
So, the dividend has increased by 39% during the last five years -- equivalent to an 8.6% compound annual growth rate.
Sage has a cash-generative business model with a high level of repeat business. That's helpful when it comes to maintaining a progressive dividend policy. When a small- or medium-sized company commits to using Sage's financial and business management software, it's inconvenient and costly to change, so inertia tends to set in. Sage has done a good job of capitalizing on that condition by promoting its recurring subscription fee, which now accounts for around two-thirds of overall revenue.
The company derives 60% of revenue from Europe, 29% from North America, and the rest from Africa, Australia, the Middle East, and Asia. With its 8% market share, Sage reckons it is the third-largest business management solutions provider in the world. Some 80% of its customers are businesses with fewer than 25 employees, which suggests room for Sage to gain market share.
Meanwhile, there is potential in the company's Web strategy, which aims to bring the advantages of the Internet to both existing and new customers through Sage applications.
Sage's dividend growth score
I analyze four different features of a company to judge whether its dividend can continue to rise:
Dividend cover: Earnings twice covered the recent dividend. Score: 4/5
Net cash/debt: At the last count, there was net cash on the balance sheet. Score: 5/5
Cash flow: Operating profits and cash flow are at similar levels. Score: 4/5
Outlook/recent trading:Cautious about Europe but otherwise confident. Score: 4/5
Overall, I score Sage 17 out of 20, which encourages me to believe the firm's dividend can continue to outpace dividends from the Footsie.
With a strong flow of cash from steady repeat business, net cash in the bank, and a management team actively seeking ways to accelerate growth, Sage's dividend prospects look promising.
Right now, the forecast full-year dividend for Sage is 10.5 pence per share, which supports a possible income of 3.7%. The shares look more attractively priced than they have for a long time.
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