Paychex, Inc. (PAYX): Safe 3.5% Dividend Yield, No Debt, and Excellent Business Consistency

Dividend Growth Score

Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

PAYX’s dividend Growth Score is 65, suggesting that the company’s dividend growth potential is above average. PAYX has paid uninterrupted dividends since 1988 and compounded its dividend at a mid-single digit pace over recent time periods.

Source: Simply Safe Dividends

Since the company’s payout ratios are relatively high (70-80%), we believe future dividend growth will align with earnings growth – somewhere in the mid- to high-single digit range. PAYX also has the balance sheet (no debt) to continue growing its dividend regardless of economic conditions.

PAYX held its dividend flat during the financial crisis but has otherwise increased its dividend each year since the mid-1990s. While it’s not close to being a member of the S&P Dividend Aristocrats Index, it sure has been a reliable dividend payer.

Valuation

Paychex, Inc. (NASDAQ:PAYX) trades at 23x forward earnings (22x excluding net cash) and offers a dividend yield of 3.5%, which is in line with its five year average dividend yield of 3.5% and provides a reasonable initial yield for investors living off dividends in retirement.

With 6-9% earnings growth potential, the stock could deliver a total return between 9% and 12% per year going forward. While it’s not a bargain, PAYX’s high quality and consistent fundamentals make it appear to be trading at a reasonable price today.

Conclusion

PAYX is a sticky, time-tested business that provides mission-critical services for its customers. It shares many traits with some of our favorite blue chip dividend stocks and has an extremely reliable dividend. While we will continue monitoring the competitive landscape, we expect PAYX’s strong brand, deep sales channels, broad product portfolio, regulatory expertise, switching costs, and flexible balance sheet will keep the company relevant for many years to come.

Disclosure: None