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.
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|
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 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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