Paychex Dividend Stock Analysis
When we work, we want to get paid. Every company has to process payroll for its employees. And many companies, especially smaller ones choose to outsource that process.
I’ve owned one such company that provides this service called Paychex (PAYX) for a number of years. And I have been very happy with its investment performance. Please join me for a dividend deep dive of this payroll and human resources services company.
COMPANY BACKGROUND
Paychex is a leading provider of integrated human capital management (HCM) solutions for payroll, human resources, retirement and insurance for small to mid sized businesses.
PAYCHEX DIVIDEND YIELD
The company is paying an annualized forward dividend of $2.24 cents per share. This results in a 3.2% dividend yield at the recent price of $71 per share.
COMPOUND ANNUAL DIVIDEND GROWTH RATE
| 1 Year | 3 Years | 5 Years | 7 Years |
| 11.9% | 10.7% | 9.5% | 7.5% |
Earlier this year, the Paychex dividend was increased by another 12%. In addition, Paychex has increased its dividend annually for 8 consecutive years. Dividend growth has accelerated in recent years as earnings have increased nicely.
REVENUE
Revenue is comes from three primary areas:
- Payroll processing – 54%
- Human resources services – 44%
- Interest earned on payroll funds held temporarily on the clients behalf – 2%
Revenue has grown consistently over the past several years due to:
- Higher employment rates at Paychex clients
- An increased volume of human resources services provided
- Higher interest rates earned on client held funds
PAYCHEX DIVIDEND, EARNINGS AND PAYOUT RATIO
The Paychex dividend and earnings have grown consistently along with revenue. And historically the company has aimed to pay out about 80% of earnings in the form of dividends to investors. Over the past year, the dividend has accounted for even less of the company’s free cash flow at about 70%.
A lower dividend payout ratio is a positive metric. It shows the company has ample room to raise the dividend in coming years. Or, withstand an earnings drop with out having to reduce the dividend.
Based on these metrics, the company’s stable track record and the fact Paychex has no debt, the dividend appears safe. Also, the Paychex dividend will likely grow at about the same rate as earning in the coming years. I estimate about 7-8%.
VALUATION & CONCLUSION
With a price to earnings ratio in excess of 25 times, Paychex stock is expensive. It is a high quality, debt free, profitable business that generously shares those profits with investors in the form of dividends. Investors have been willing to pay a premium for these admirable qualities and it shows in the high price to earnings ratio. A lower ratio typically represents a better value for the investor.
WRAPPING IT UP
I like this company a lot. It is one of my larger holdings. Mainly because I initiated my position at depressed prices in 2009 and continued to add on over the following couple of years. This sounds great, but wasn’t easy. By 2009, the average investor had run from the stock market after it collapsed over the prior 18 months.
The main downside from an investment perspective is the high valuation. Due to the size of my holding and the high valuation, I won’t add more at this time. However, absent changes in the business fundamentals, I’d be a buyer at prices below $60 per share and very aggressive at $55 or less. I’ve got this stock on my watch list and will wait for the next major correction to consider adding to my holdings.
WHAT ARE YOUR COMMENTS?
Do you own Paychex? Or perhaps they process your payroll deposit for your employer?
Leave a comment and let us all know!
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Disclosure & Disclaimer
As of this writing, I am long PAYX. Always remember that the information on this site is for educational and entertainment purposes only. The information is not to be used as investment advice specific to your circumstances. Consult your personal investment and/or tax advisers prior to investing money. Please realize you are solely responsible for any investment gains or losses as a result of the investments you enter into. You can find additional information under this site’s disclaimer tab: Disclaimer & Privacy Policy.
Hi Tom, the payroll and HR seems solid business. Many small and mid companies don’t want to deal with the hassle, and outsource it. I heard about ADP, not Paychex. It looks the revenue of Paychex has been growing very decently in the last 6 years. Thanks for sharing the information.
Hi Helen, Yes. ADP is a bigger player in this space and also a very good company and great dividend growth stock. Most folks have heard of ADP, but not as many have heard of Paychex. It’s a really solid company from my perspective. Tom
Nice article. I’m not an individual stock guy. Your strategy, though, is a good one. It takes time to focus and watch. You obviously are geared that way.
I’m curious what service you use to get your charts?
Hi Fred, Thanks for stopping by and commenting. And I appreciate the kind words. Dividend stock investing takes just what you say: focus and awareness. I will throw in patience too. For my charts, I download the data from sources on the web, mainly Yahoo finance and do the charts in excel. I suppose similar charts can be found on the web, but I like to customize them for my purposes. These are the metrics I look at to make decisions, so I like to put my hands on the data and look at the results in a format I am comfortable with. Tom
I had considered ADP when starting my portfolio, but had not looked at PAYX despite some familiarity with them. They currently process my subsidized Cobra payments through my former employer, and they also manage the payroll where my sons work.
I think this space is quite solid, but do agree with you that they are currently trading at a premium (as is ADP).
Really enjoy your deep dives, and I was going to ask the same question about your charts–I had a suspicion that you were generating these; nicely done.
Thanks DD. I like both PAYX and ADP. One reason, is they tend to benefit from higher interest rates (like insurance companies and unlike REITs and utilities) so they add another dimension of diversification to the portfolio. I know you are a FastGraphs user and I have heard good things about that service from you and others. Tom
Awesome company with excellent track record. It’s hard to find great companies with no debt and such high dividend growth!
Hi German, Thanks for stopping by. Good to hear from you. You got that all correct from my perspective. Now if we could get a little correction maybe we could pick some up at a better price. Tom
It seems like a solid business with a strong reputation. Everyone wants to get paid at the end of the day and they provide this valuable service to their clients. You bought at a good time (even though it’s hard to do). Just quickly looking up their competitor ADP, I see everything being higher from price, to PE to yield, yikes!
Hi SMM. They are both really good dividend growth stocks and companies. They don’t go on sale very often. So when they do, you have to be ready to buy. Tom
Never heard of PAYX but a company with NO DEBT?! That’s amazing. I’ll be sure to mention this to my husband he likes companies that have a lot of cash and no debt. Yeah, the P/E is a little high but something to keep in mind for when the next crash comes.
It’s a GYM of company! How do you like that pun?
Great company – but the minute I saw the company you were analyzing, I had a hunch the conclusion would be that they are too expensive. I would love to buy them if the price ever decreases; however, today is not that day haha Thanks for the detailed write up though!
Bert
Hi Bert, I wonder what your personal philosophy is when you are in this situation. Mine is to hold even though the stock is expensive and it is one of my larger positions. Would you sell and reinvest the proceeds in a dividend stock with a lower valuation or just hold like me? Tom
“By 2009, the average investor had run from the stock market after it collapsed over the prior 18 months”. When I read this, I’m reminded of that quote that goes something like “invest when there is blood in the streets”.
Apart from that, Paychex looks like a great company, though my only concern is how much it’s tied to the economic cycle and expanding employment.
Cheers,
Miguel
Hi Miguel, Yes. Good point. Paychex is tied to the expanding economy and employment trends. Which is one reason why it was so cheap back in 2009 when unemployment had sky rocketed. They even froze the dividend for a year or two back then to weather the storm. So that is a risk. Hopefully we won’t have another huge collapse like that. Have a great weekend. Tom
I hold both ADP and PAYX. As PAYX targets smaller companies my two questions are how are their clients positioned for the next downturn and their nimbleness in fending off competitors such as WDAY.
Good questions SR. I can’t say I have the answers, but they are valid concerns. You must have reconciled them in your mind to some degree (I assume) since you still hold. Tom
Looks like a great company Tom, definitely carrying a premium price though. You did well buying back in 2009, it’s been on a steady trajectory upwards since!
I also like that you’ve continued to hold even though you consider it expensive, as you mentioned to Bert above. As a value focused investor I can’t help but want to move funds from overvalued (or at least high valued) stocks into undervalued stocks – but that makes it hard to hold on to some of the best companies.
Not sure I’d have managed to hold Paychex for the past 9 years, but I’ve been leaning my investment strategy in that direction over recent years. Buying and selling too often is a killer to returns.
Cheers, Frankie
Hi Frankie, Part of what motivates me to hold over valued stocks is I don’t like to monitor my holdings that closely and continue to trade in and out. In addition, I don’t like to realize gains and pay capital gains taxes. So I tend to buy and hold forever unless the dividend appears at risk or worse gets cut, then I look to exit. These may not be the best reasons, but they work for me. Tom