In the middle of a recession, looking at tech stocks as a safe haven might seem strange. Software stocks in particular are highly geared to capital investment – and companies can cut expenditure on new software extremely savagely, and surprisingly quickly.
But the computer software and services sector is highly diverse, and it's worth looking hard to see what kind of a beast you have in front of you. Some software stocks, it's true, are highly dependent on licence fee income from new sales, and these are the companies that are suffering the worst from the recession. Some services providers, too, are dependent on big projects – just the kind of high profile investments that tend to get cut when the knives are out.
But there is also an increasing number of companies which have high quality recurring income streams – some from maintenance and subscription income, others from the provision of network or IT management services. In particular, 'software as a service' is a concept whose time has come – companies as diverse as Fidessa Group Plc in financial trading, Statpro Group in asset management, and Aveva Group in industrial design software, have all moved into charging for usage rather than upfront payments.
It's also worth comparing earnings declines in computer services with other sectors. Most of the larger companies are seeing brokers forecast a fall in EPS of around 15% - some are still expected to grow. Compared to, say, retail or real estate, that looks good.
Some of the services companies are trading on quite nifty yields. Headline historic yield for the sector is 3.9%, good though not great, but a number of stocks are trading on more.
For instance Tikit Group, a company which focuses on business in the legal sector, has a 4.7% yield and held its interim dividend despite a rather weak set of interims, with profits down a third. Over 50% of its revenues come from contracted managed services; while clients obviously can exit such contracts, it would cost them to do so. Tikit has also done well increasing support revenues for its own software products, which increased from £1.37m to £2.09m revenue in H1 2009 [1] .
It's worth noting that the dividend is well covered – while some of the more obvious sectors for income investors offer high yields…
