Paychex: A Well-Managed Outsourcing Company With A Steady Dividend

| About: Paychex, Inc. (PAYX)

Summary

Paychex is a leader in payroll and human resource outsourcing for small- to medium-sized business.

The company has paid a steady, growing dividend since 1989.

With a high return on equity, no debt, and strong management, the company is a solid addition to any portfolio.

Introduction

Paychex (NASDAQ:PAYX) is a steady, strong company that any dividend investor should get familiar with. It is a leading provider of integrated payroll, human resource, insurance, and benefits outsourcing solutions for small- to mid-sized businesses. The company has a strong dividend, which it has maintained since 1989, and continues to grow its dividend at a relatively consistent rate. The dividend has remained stable through numerous recessions, and with well balanced revenue sources, the company seems as though it can survive any downturn in the economy. It maintains a high return on equity of 35%, has no debt, and maintains a strong cash flow. It has a strong management team with experience that has longevity with the company. It has shown the ability to continue growing at a steady pace, and looks like a good addition to any portfolio. I believe that PAYX is a good dividend investment for investors with an extremely long-term horizon - the type of company investors can buy and hold with reinvesting dividends for decades for phenomenal returns. As a note, all financial data in this article is taken from the most recent quarterly release and accompanying investor presentation, which can be found here.

Bull Thesis

PAYX derives 65% of its revenue from payroll outsourcing, with the rest coming from human resource outsourcing, which includes insurance and benefits packages for its clients. These are well-balanced revenue sources, and ensure the company won't be too badly damaged should one of its revenue sources suffer a setback. It targets small- to mid-sized businesses, with 1,000 employees or less. This is a niche market, and PAYX is the undisputed leader in this market with over half a million clients and 100 offices nationwide. It also recently introduced Paychex flex, a cloud based solution, that shows that this company is capable of evolving in ever-changing business environments. With strong cash flow, the recent financial presentation presents a few long-term initiatives to employ cash and increase shareholder value, including maintaining its dividend and a stock repurchase program through 2017. It also highlights strategic acquisitions as a major cash deployment strategy, and its past acquisitions have proven to be successful.

Financially, the company continues to look strong. It expects to grow net income between 6% and 8% this year. It has maintained an extremely high return on equity of 35%, which means that management has focused its cash employment efforts on increasing shareholder value quite successfully. It also has no debt and maintains a strong cash flow. The company has extremely healthy financials, and should maintain steady growth into the near future. Its dividend history stretches back over 20 years, and the company has grown its dividend fairly consistently over that time. Starting at only $0.03 per quarter, it is now at $0.38. The ability to maintain its dividend over the long term, through numerous economic cycles, bodes well for the company's future.

The management at PAYX is experienced and has longevity with the company. The CEO has been in place since 2010, and it has only had three CEOs over its 43-year operating history. The original founder, B. Thomas Golisano, is still a member of the board, and the company has continued his management style: fiscal responsibility, increasing shareholder value, and maintaining steady growth. This is a management team that gives me confidence in the company going forward, and I believe that investors can trust that this team will continue to increase shareholder value into the future.

Conclusions & Red Flags

PAYX looks like a solid option for anyone looking to add a dividend stock to their portfolio. It maintains a steady growth rate, constantly increases the dividend, shows fiscal responsibility and has a strong balance sheet, and works hard to increase shareholder value. My biggest current concern with PAYX right now is pricing. According to Yahoo Finance, it has a relatively high PE rate of 27.03, with a PEG of 2.53. With such a high premium, many investors may want to wait for a pullback to invest. That being said, this is a long-term story and investors should buy the company with a decades long horizon. I recommend initiating a small position and buying more shares on pullbacks, with the intent to hold the company long term and reinvest the dividends quarterly.

Disclosure: The author is long PAYX.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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