(This article originally appeared on The DIV-Net February 9, 2009.)
Company Description: Paychex, Inc. provides payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the United States.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
PAYX is trading at a discount to 1, 2 and 3, above. Since PAYX’s tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, PAYX is trading at a 51.9% discount. PAYX earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
PAYX earned all available Stars in this section for the four valuations above [5, is a deduct only]. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive four year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.). I consider this a key metric since dividends will double every five years if they grow by 15%. PAYX has paid a cash dividend to shareholders every year since 1988 and has increased its dividend payments for 17 consecutive years. It’s one year dividend growth rate exceeded its five-year growth rate. This could indicate the growth rate is accelerating.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to > MMA
PAYX earned both of the available Stars in this section. The NPV MMA Diff. of the $248,717 is in excess of the $7,500 minimum I look for in a stock that has increased dividends as long as PAYX has. PAYX’s current yield of 4.77% exceeds the 3.42% estimated 20-year average MMA rate.
Other: PAYX is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company has a strong balance sheet and the nature of the business provides for regular cash inflows. With the economic downturn leading many companies to layoff employees, PAYX’s earnings could be adversely affected in the short-term. However, over the long term, the company should benefit from a solid management team, higher retention rates, falling attrition and strong profitability. Risks include economic uncertainty in the small-to medium-sized business segment, pricing and margin pressure from Automatic Data Processing (NASDAQ:ADP).
Conclusion: PAYX earned one Star in the Fair Value section, earned four Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of seven Stars. Since my scale tops out at five, this quantitatively ranks PAYX as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $81.45 before payx’s NPV MMA Differential fell to the $7,500 that I like to see. At that price the stock would yield 1.47%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $7,500 NPV MMA Differential, the calculated rate is 4.3%. This dividend growth rate is substantially below the 17.8% used in this analysis, thus providing a margin of safety. PAYX has a risk rating of 1.75 which classifies it as a medium risk stock.
PAYX is trading substantially below my calculated buy price of $55.94. I will continue to cautiously add share as PAYX’s price and my allocation allows. For additional information, including PAYX’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in PAYX (1.9% of my Income Portfolio).