Dividend Analysis - Paychex Inc (NASDAQ:PAYX)
17 October 2007Dividends Matter reader Jim has suggested that we have a look at Paychex Inc which trades on the NASDAQ under the symbol PAYX. Is this a worthy candidate for our portfolio of superior dividend yielding stocks?
Let’s find out!
Company Profile:
From Yahoo Finance
Paychex, Inc. provides payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the United States. It offers payroll processing services, which include the calculation, preparation, and delivery of employee payroll checks; production of internal accounting records and management reports; the preparation of federal, state, and local payroll tax returns; and online payroll services. In addition, it offers employee payment services; and regulatory compliance services, including new-hire reporting and garnishment processing. Further, the company’s human resource services include retirement services administration; workers’ compensation insurance services; health and benefits services; employee benefits administration; time and attendance solutions; and other human resource services and products.
Market capitalization is $15.77B.
Company Fundamentals:
Management has delivered an excellent return on invested capital (ROIC) over the last 10 years. The lowest ROIC in any given year was an amazing 25.2%! The 5 year average ROIC is 26.8%. In the early part of the 10 year period, management was delivering over 30% ROIC. So it has slipped a bit but still an amazing number.
Return on equity is almost an exact match. And you can see the consistency. The 10 year average ROE is 29.57%. The 5 year average ROE is just slightly lower at 27.3%.
Equity growth rate has slowed down from the earlier years. The 9 year rate is 20.44%. The 5 year rate drops to 15.55%. The 3 year rate picks up to 17.35% and last year’s equity growth rate stayed there at 17.42%. Excellent year to year growth rates.
Earnings per share growth rate has been a bit more consistent, but follows the same pattern. The 9 year rate is 17.75%. The 5 year rate drops to 14.5%. The 3 year rate picks up to 18.68% and last year’s EPS growth rate was 15.57%.
Sales growth rate has been quite consistent. The 9 year rate is 8.21%. The 5 year rate bumps up to 14.63%. The 3 year rate hangs there at 13.64%. And last year’s cash flow growth rate dips to 12.68%.
These are all solid fundamentals in my opinion.
Dividend Fundamentals:
The current dividend yield is 2.87%. I consider that above average by comparing it to the dividend yields of the S&P 500 index (1.91%) and the DJIA (2.36%).
The dividend growth rate has been excellent over the years. Now, it has come down from its lofty rates of 50% growth rates back in 1998, 1999 and 2000. Although the 9 year rate is 22.92%, the 5 year rate drops to a more reasonable 12.82%. The 3 year rate picks up to 18.97% and last year’s dividend growth rate was a whopping 29.51%! However, you can see there were a few lean years with just low, single digit increases from 2002 to 2004.
Dividend payout ratio has remained fairly consistent over the last 6 years in the 55% range. Last year’s dividend payout ratio was 56%.
Cash flow growth rates have been fairly consistent with the 5 year rate coming in at 14.85% and last year’s rate of 14.81%.
Although the dividend growth rate has been choppy, management has consistently raised the dividend. I like to see commitment to yearly dividend growth!
Valuation Models:
Time to get down and dirty with some number crunching. What is a fair price to pay for this consistent dividend raiser?
Looking at the historically high dividend yields over the last 10 years, I see that the 10 year average high dividend yield is 1.6%. The 5 year average high dividend yield comes in at 2.02%. With the current dividend yield at 2.87%, you know this stock is selling at a discount.
If I demand the 5 year rate, then my average high dividend yield model price works out to $59.45. At the current price of $41.88, Mr. Market is selling this stock at a discount of 29.55%!
Mr. Benjamin Graham would vehemently disagree! The Graham number works out to a mere $12.95! That implies a premium of 223%! What a difference from our average high dividend yield model price.
For my discounted present value method, I used the following inputs:
- future EPS growth rate of 15% (Although my initial estimate was 15.55% which was derived from the 5 year equity growth rate, analysts have forecast 15%. I’ll use their more conservative value.)
- future PE of 28.69 (This is the current P/E and is lower than the 10 year average P/E of 44.02 and the 5 year average P/E of33.4.)
- dividend yield of 2.02% (the 5 year average high dividend yield)
- future dividend growth rate of 12.82% (This is the 5 year dividend growth rate. With the inconsistent dividend growth rates of the past, this is hopefully a good assumption.)
With this information, my model price works out to $58.04 or a discount of 27.84%. This is consistent with my average high dividend yield model price.
Check my dividend analysis of PAYX.
Here is the 1 year stock price chart:
Conclusion:
PAYX has delivered amazing ROIC over the last 10 years. All the fundamental growth rates look solid. And this stock appears to be selling at a discount!
I like this one and will add it to my portfolio of superior dividend yielding stocks. Thanks for bringing this stock to my attention Jim.
Full Disclosure: At the time of this writing, I do not own shares in PAYX.
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on October 17th, 2007 at 9:10 am
Hey Joe - Thanks for the analysis. Do you think that you P/E ratio is a bit high? I know historically it falls in place, but I might be a bit more conservative with the ratio. It is higher than the average P/E for the S&P.
Just wondering…
on October 17th, 2007 at 10:19 pm
I believe that the S&P 500 PE is usually in the 15 to 17 range. But I would have to confirm that.
So yes, this is a fairly high PE at 28.69. It is far below the historical PE values. But it does not seem an unreasonable level for a future EPS growth rate of 15%.
Typically, when I look for a future PE, I will use the more conservative of the historical PE or the current PE. But, I will also use a rule of thumb of 2 times the future EPS growth rate. I’ll then use whichever number is lower.
As you’ll see, when I sometimes analyze a utility with a future EPS growth rate of 4%. I will typically assign a future PE of 8 - even if the lowest historical PE is at 15. Why? Because I think that PE is just too high for such low growth prospects. And if I am right about the low EPS growth rate, that PE will contract.
AJ
on October 23rd, 2007 at 6:26 pm
PAYX looks like a pretty good play for the portfolio. The dividend growth is quite impressive there and the valuation seems to be pretty good compared to its peers as well.