Entering text into the input field will update the search result below

Buying Paychex For Income

Mar. 10, 2020 4:38 PM ETPaychex, Inc. (PAYX)17 Comments


  • I bought Paychex because of its attractive dividend yield and long-term capital gains potential.
  • The company is supported by a strong product portfolio, which is generating high organic growth and long-term potential.
  • Investors get to enjoy rising dividends, a strong balance sheet, and a high but stable payout ratio.

In this article, I will tell you why I recently added Paychex (NASDAQ:PAYX) to my dividend portfolio. This Rochester, NY-based provider of staffing and outsourcing services offers a good dividend of currently 3.4%, a solid balance sheet, a healthy payout ratio, and strong fundamental growth. I added the stock as I like the higher dividend yield caused by the stock price decline and the company's future potential. While mid-term challenges will likely continue to cause volatility and potentially further stock price declines, I have little doubt this company will be a strong long-term addition to my portfolio as I expect both capital gains and increasingly higher dividend payments.

Image result for paychex

Source: Paychex

What's Paychex?

Paychex, founded in 1971, is a provider of human resource, payroll, and benefits outsourcing services for small- and medium-sized firms. The company, headquartered in Rochester, NY, employs 15,700 employees, and is a member of the S&P 500 with a market cap of $26.6 billion. The company operates with an integrated, cloud-based HCM (healthcare data management) platform and a personalized technology-enabled service model. As a result, the company is a leader in comprehensive HR outsourcing solutions and has more than 670,000 clients employing more than 12 million employees.

Growth Is Solid & Accelerating

Having an 'interesting' and promising product portfolio and business model is one thing. However, turning this into growth is another thing. As you can see below, the company has done tremendously well since the recession. Since 2010, sales have gone from $1.95 billion to $3.69 billion in 2019. Operating income has accelerated from $725 million to $1.38 billion. That's a 7.4% compounded annual operating income growth rate.

Source: TIRK.com

The most recently revealed second quarter of the 2020 fiscal year is confirming further strength. Total sales accelerated by 15% to $991 million. The organic growth rate was at a solid

This article was written by

Leo Nelissen profile picture

Welcome to my Seeking Alpha profile!

I'm a buy-side financial markets analyst specializing in dividend opportunities, with a keen focus on major economic developments related to supply chains, infrastructure, and commodities. My articles provide insightful analysis and actionable investment ideas, with a particular emphasis on dividend growth opportunities. I aim to keep you informed of the latest macroeconomic trends and significant market developments through engaging content. Feel free to reach out to me via DMs or find me on Twitter (@Growth_Value_) for more insights.

Thank you for visiting my profile!

Analyst’s Disclosure: I am/we are long PAYX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article serves the sole purpose of adding value to the research process. Always take care of your own risk management and asset allocation.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (17)

Alluic profile picture
83% payout ratio right now, hope they do not cut the div.
KMR holder profile picture
PAYX always has paid a large portion of their cash flow to shareholders. That is a benefit of their asset light business model. The problem for investors is that since they pay a hefty dividend income investors bid up the share price to unreasonable levels at time. That is why I wait for the occasional opportunities to load up on the shares and sell them later as the price rises and the yield drops.
KMR holder profile picture
I last bought PAYX back in 2011 when I believed that the world wasn't coming to an end. I paid $25.42 a share for a more than 10% sized position. That was a very good time to buy the shares. I started scaling out in 2016 and sold the last of the position last March at $78.49.

I don't think that the world is coming to an end financially today but I think $55 is still too expensive to own the shares. I will wait for a price below $50 to start buying again. If I can get those prices, a position should be relatively low risk.
thebucketshop profile picture
PAYX is never cheap. I would consider 17X earnings a "distressed" price. That's what it was generally during the year 2009.

I have put my order in for 22X earnings, or 3.5% yield. That works out to a price of $69. If it goes lower than that, I will buy more.
jgrever621 profile picture
Buying PAYX today might not be the best idea, though certainly a good company.

I have wanted to add for a long time; just couldn't find the right time. And I don't think now is the time either. This due to questions about the economy for one, and the other is there are getting to be other opportunities with better prospects and higher returns. All due to the virus at this time, anyway.

Think we can wait another month or so before there is enough clarity regarding the economy rebound in the second half, and waiting to buy currently looks to provide more and better chances for safety and profit.
Leo Nelissen profile picture
The market is down 20%. A lot has been priced in. This stock can certainly go lower - just like the market in general. Nonetheless, I started buying some high-quality companies that I have liked for a very long time. I will continue to buy if stocks go even lower. It's just important to keep cyclical exposures low.
Have held PAYX for years, and it has performed well. With this downturn I'm beginning to seriously consider adding more.

Retired dividend-growth investor
Slight headwind from FED interest rate manipulation. Interest income was about 5% of pretax operating income in 2019.
NINK profile picture
10 Mar. 2020
PAYX is a company that I have long coveted to add at the right price. However, it got cut in half during the last recession, declining 50.3% from 8/31/2007 to 2/27/2009. That recession led to a financial crisis, and people losing homes that they should not have taken the debt to buy in the first place. That brought PAYX down to under 15 times earnings.

However, PAYX is leveraged to payrolls, and, for the most part in the last recession, people did not have their jobs eliminated or suspended, except in the mortgage industry, and those guys deserved it. This time around, we're look at a true, across the board, economic recession. It's pretty hard to find an industry anywhere that will not feel the pain from this. There will be many fewer payrolls to process for a while, unless I miss my guess. The pain could be much greater for PAYX. 15 times last year's earnings gets you to roughly $46.50 a share. They are currently trading at 76.71, after the most recent corrections.

So, my question is, how certain are you that we are not about to head into a recession, led by lower employment than the last recession? Buy if you have conviction... it is a great company, they'll likely do great in the long term, but, I'm going to wait a while.
I've been wanting PAYX for many years, but it is always a bit too expensive.

With a forward P/E over 21 (per the article, and almost 24 today after 3-10-20 close) I'm afraid it is cheaper than it was, but it only went from absurdly overvalued to somewhat overvalued.
Finally got some PAYX in the mid 55 range! After waiting a (very) long time. P/E in the high 18.xx range.

I have a feeling that at some point in the future I'll wish that I had bought a lot more.
PAYX is an excellent company at a fire sale price. Very little debt, excellent income statement, great dividend, with a diversified product offering. The 10 year bond is below 1% and PAYX pays a dividend yield well over 3%, taxed as capital gains vs ordinary income. A no brainer.
siestadreamer profile picture
I’m happily long PAYX, @Leo Nelissen, and I think you will be, too. I guess the pullback is discounting a recession, which seems unlikely to me.
siestadreamer profile picture
Recession now appears all but certain. Unfortunately, small businesses—PayChex’ bread and butter—are in the crosshairs.
Gary Jakacky profile picture
PAYX is one of those sleep-well-at-night stocks that are rarely on the bargain counter.

Exactly how some overrated Chinese Chest Cold means that businesses will suddenly do their own payroll processing escapes me.
Leo Nelissen profile picture
It's a great company. Ony of my favorite dividend stocks at the moment. Glad I bought low. Although it needs to be seen if this is the bottom... Either way, can't hurt to buy well below its ATH
Gary Jakacky profile picture
I supplement the already good income from PAYX (and some other blue blue chips) by writing calls at strikes that are comfortably above the prevailing price. (I live frugally so the premiums are fine). Yet I still manage to score most of the capital gain.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.