Why Paychex Inc (NASDAQ:PAYX) Should Be In Your Portfolio
There is a lot to be liked about Paychex Inc (NASDAQ:PAYX) as an income stock, over the past 10 years it has returned an average of 4.0% per year. The company currently pays out a dividend yield of 3.0% to shareholders, making it a relatively attractive dividend stock. Does Paychex tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.
See our latest analysis for Paychex
How I analyze a dividend stock
If you are a dividend investor, you should always assess these five key metrics:
Is it the top 25% annual dividend yield payer?
Does it consistently pay out dividends without missing a payment of significantly cutting payout?
Has the amount of dividend per share grown over the past?
Can it afford to pay the current rate of dividends from its earnings?
Will it be able to continue to payout at the current rate in the future?
How does Paychex fare?
The company currently pays out 79.2% of its earnings as a dividend, according to its trailing twelve-month data, which means that the dividend is covered by earnings. In the near future, analysts are predicting a payout ratio of 77.0%, leading to a dividend yield of 3.2%. Moreover, EPS should increase to $2.86.
If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider the cash flow of the business. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.
Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. PAYX has increased its DPS from $1.24 to $2.24 in the past 10 years. During this period it has not missed a payment, as one would expect for a company increasing its dividend. These are all positive signs of a great, reliable dividend stock.
Relative to peers, Paychex generates a yield of 3.0%, which is high for IT stocks but still below the market’s top dividend payers.
Next Steps:
Keeping in mind the dividend characteristics above, Paychex is definitely worth considering for investors looking to build a dedicated income portfolio. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. I’ve put together three relevant aspects you should further research:
Future Outlook: What are well-informed industry analysts predicting for PAYX’s future growth? Take a look at our free research report of analyst consensus for PAYX’s outlook.
Valuation: What is PAYX worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether PAYX is currently mispriced by the market.
Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
