Dividends & Paychex

Paychex, Inc. is rated a ‘buy’ for long-term gains and attractive, rising dividends. It earned record profits for the second year in a row—and expects to set a new record this year. We believe it will keep raising its dividends each year and maintain its place on most high dividend stock lists.

Paychex, Inc. (NASDAQ─PAYX) is a U.S. provider of payroll, human resource and benefits outsourcing services to small- to medium-sized businesses. It is a buy for long-term price gains as well as high and rising dividends.

In the year ended May 31, 2015, Paychex earned $675 million, or $1.85 a share (all figures in U.S. dollars), up 8.2 per cent from $628 million, or $1.71 a share, the year before. EPS rose more than total profit, as Paychex bought 3.9 million of its own shares.

President and CEO Martin Mucci said, “Payroll service revenue experienced steady growth for the fiscal year, driven by increases in revenue per check and client base.” In fiscal 2015, payroll revenue rose 3.6 per cent, to $1.657 billion, or 61 per cent of service revenue. By May 31, Paychex had 590,000 payroll clients, up two per cent from a year earlier.

Mr. Mucci adds, “We achieved a milestone of $1 billion of Human Resource Services revenue for fiscal 2015, as strong demand . . . drove double-digit growth.” Human resource revenue rose 18.4 per cent, to $1.041 billion, or 39 per cent of service revenue. In both businesses, Paychex retained a record level of clients for the third year in a row.

Cash flow rose 7.3 per cent to $886 million, which confirms its higher earnings. More important, cash flow exceeded capital spending of $106 million, acquisitions of $27 million and dividends of $552 million. Of the excess cash flow of $201 million, $182 million was directed to share buybacks.

Thanks to its excess cash flow, Paychex remains debt free, with (as of May 31) $936 million in cash and corporate investments. This gives it both financial flexibility and the means to keep on raising its dividends.

Raises its dividend most years

Back in 1999, Paychex paid dividends of $0.15 a share. But it raises its dividend most years. The only exception was during the financial crisis and recession of fiscal 2009 through fiscal 2011. In those years, Paychex maintained its dividend at $1.24 a share. It now pays $1.52 a year.

In fiscal 2016 (which began June 1), Paychex expects its net profit to grow eight to nine per cent. Multiplying the midpoint of 8.5 per cent by last year’s EPS works out to less than $2.01. Factor in share buybacks and Paychex should earn a record $2.01 a share.

Divide Paychex’s share price by this estimate and you get a hefty price-to-earnings ratio of 23.8 times. Still, rising earnings and a high expected return-on-equity of 38.8 per cent likely justifies this high ratio. Next year, Paychex is expected to earn a record $2.20 a share. Based on this estimate, the shares trade at a still-high but better forward P/E ratio of 21.7 times.

The U.S. economy is generating lots of jobs. And small- to medium-sized businesses are generating the most jobs. As a result, Paychex’s long-term outlook is favorable. That’s likely why management is willing to own 11.1 per cent of the company. This makes its interests similar to yours.

 

The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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