However, these expenses have been spent on upgrading its payment systems to stay competitive in a 21st century workplace. For example, ADP offers a prepaid debit card, which employers can use to directly receive paychecks. Although Automatic Data Processing (NASDAQ:ADP)’s dividend yield of 2.5% is lower than Paychex, it appears to be growing at a faster clip than its smaller rival.
Intuit
Last but not least, we should take a look at Intuit Inc. (NASDAQ:INTU), the creator of TurboTax and other products for small businesses, such as DemandForce (marketing software) and QuickBooks (accounting software). These products, which have been updated as cloud-based software as a service, have lured away many smaller businesses which would have otherwise relied on companies like PayChex for their payroll needs. In other words, small businesses are realizing that the power of Intuit Inc. (NASDAQ:INTU)’s cloud-based software can allow a relatively small on-site HR staff to manage a company’s payroll with ease.
This growth in demand from small businesses was reflected in its third quarter earnings, when the company reported a 12% increase in profit on 13% growth in revenue to $2.18 billion. The company topped the analyst consensus on profit while matching expectations on revenue. Total revenue from its small business software rose 17%.
Intuit Inc. (NASDAQ:INTU) reported impressive sales gains for its TurboTax and QuickBooks software, which rose 6% and 26%, respectively. This indicated that not only were more individuals and small businesses using its software for filing taxes, but also for accounting tasks as well. Since its initial release in 2000, QuickBooks has captured 90% of the small business accounting software market. QuickBooks is designed for small business owners with no formal accounting training, which has contributed to its growing popularity. A recently released version of QuickBooks for the iPad has also boosted its mobile presence considerably.
The Foolish Bottom Line
In closing, let’s compare these three companies on a fundamental basis to see which is the better long-term investment.
| Forward P/E | 5-year PEG | Price to Sales (ttm) | Return on Equity (ttm) | Debt to Equity | Profit Margin | Dividend Yield | |
| Paychex | 19.99 | 2.38 | 5.81 | 35.53% | No debt | 24.81% | 3.6% |
| Automatic Data Processing | 21.73 | 2.63 | 3.01 | 21.54% | 0.23 | 12.86% | 2.5% |
| Intuit | 16.67 | 1.46 | 4.06 | 25.29% | 13.98 | 19.76% | 1.2% |
| Advantage | Intuit | Intuit | ADP | Paychex | Paychex | Paychex | Paychex |
Source: Yahoo Finance, 6/28/2013
Paychex appears to be a solid, stable pick for income, but its PEG ratio suggests that it won’t grow very much over the next five years. Intuit Inc. (NASDAQ:INTU), on the other hand, looks fundamentally undervalued for a tech stock, but it has more debt than either Paychex or ADP. It also has the leanest dividend. However, both Paychex and Intuit could fall faster than Automatic Data Processing (NASDAQ:ADP) in the event of a prolonged economic downturn, due to their exposure to smaller businesses.
Regardless of these concerns, I believe that all three stocks are relatively safe investments that offer important services for smaller and larger businesses. Therefore, they all might be worth picking up during a market swoon in a volatile market.
The article Will Investing in These 3 Payroll Stocks Pay Off? originally appeared on Fool.com and is written by Leo Sun.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Automatic Data Processing, Intuit, and Paychex. The Motley Fool owns shares of Intuit. Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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