Last update on 2024-06-28

Paycom Software (PAYC) - Dividend Analysis (Final Score: 4/8)

Detailed dividend analysis of Paycom Software (PAYC) based on an 8-criteria scoring system. Final score: 4/8.

Short Analysis - Dividend Score: 4

We're running Paycom Software (PAYC) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

The analysis of Paycom Software (PAYC) using an 8-criteria scoring system to assess its dividend policy flags several considerations for investors. It reveals that Paycom has only recently started paying dividends in 2023, with a yield of 0.5442%, lower than the industry average of 0.79%. Historically, the company had no dividends from 2010 to 2022. The company has shown strong stock price and EPS growth, but its dividend coverage ratio and payout history raise questions regarding dividend sustainability. The coverage by free cash flow appears strong in recent years, but the lack of long-term dividend payout stability and history of reliable stock repurchases makes PAYC less ideal for investors seeking stable dividend income.

Insights for Value Investors Seeking Stable Income

For income-focused investors seeking stable and consistent dividends, Paycom Software may not be an ideal choice given its recent entry into dividend payouts and lack of long-term stability. However, the company's strong earnings growth and improved free cash flow coverage may appeal to investors looking for potential future growth. It might be worth keeping an eye on Paycom for future developments in its dividend policy, but it should be approached with caution from a dividend income perspective.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield represents the annual dividend payment to shareholders as a percentage of the stock's current price. It's a crucial indicator of the return on investment for income-focused investors.

The dividend yield for Paycom Software in 2023 is at 0.5442%, which, interestingly, is lower than the industry's average of 0.79%. Looking at historical data, Paycom Software did not issue any dividends from 2010 to 2022, introducing its first dividend in 2023. This indicates a relatively new approach towards returning capital to shareholders via dividends. Regarding stock price performance, Paycom Software has shown substantial growth, with its stock price closing markedly higher than its early trading days—from $26.33 in 2014 to $206.72 in 2023. Despite the robust stock price appreciation, Paycom's initial dividend yield lags behind the industry average. This could be concerning for investors focusing on dividend income; however, it might also reflect the company’s growth phase and a decision to reinvest profits back into the business for future growth, evidenced by the absence of dividends in prior years.

Average annual Growth Rate higher than 5% in the last 20 years?

The Dividend Growth Rate measures the annualized percentage rate of growth in a company's dividend payments over a specified period, in this case, 20 years. A rate higher than 5% suggests strong, consistent profitability and cash flow, and it's essential for income-focused investors because it indicates potential future income stability or growth.

Based on the Dividend Ratio data, Paycom Software (PAYC) has not issued any dividends in the last 20 years. The Dividend Per Share Ratio is zero for each year from 2010 to 2023, leading to an Average Dividend Ratio of 0.0. This trend can be considered bad for dividend-seeking investors because it indicates that Paycom does not distribute its earnings through dividends. Investors often favor companies with a stable and growing dividend to ensure a steady income stream. In Paycom's case, it appears the company might be reinvesting its earnings back into the business or focusing on growth strategies that do not include dividend payouts.

Average annual Payout Ratio lower than 65% in the last 20 years?

Explain the criterion for Paycom Software (PAYC) and why it is important to consider

The criterion evaluates if Paycom Software (PAYC) maintains an average payout ratio lower than 65% over the last 20 years. The payout ratio reflects what portion of earnings a company pays to shareholders in dividends. It's a significant indicator of dividend sustainability and financial health.

Dividends Well Covered by Earnings?

dividends are well covered by earnings

Analyzing the Earnings per Share (EPS) data, we see a consistent upward trend from 2010 to 2023, with noticeable growth in the last several years. The EPS rose from 0 in 2010 to 5.9055 in 2023. Contrarily, the Dividend per Share (DPS) remained at 0 from 2010 to 2022, indicating no dividend payout during this period. However, in 2023, a DPS of 1.125 was introduced. Covering dividends with earnings is critical as it ensures the company generates sufficient profits to support its dividend payments without jeopardizing its financial stability. The Dividend Coverage Ratio (DCR) for most years is 0 due to no dividends paid. However, in 2023, the DCR is approximately 0.19, suggesting that the current dividend policy may be unsustainable without careful management of earnings or adjustments to the dividend policy. This initial DCR is rather low, indicating potentially high dividends relative to earnings, which could be concerning for maintaining long-term dividend payouts and financial health. Overall, while the EPS growth is strong, the introduction of dividends needs to be carefully monitored to ensure that PAYC maintains a sustainable payout ratio.

Dividends Well Covered by Cash Flow?

Dividends well covered by cash flow means the free cash flow generated by the company is sufficient to meet its dividend obligations. It is an indicator of sustainable dividend payments.

The data shows that Paycom Software struggled in earlier years to generate positive free cash flow, particularly in 2011 where the value was negative, resulting in no coverage. However, post-2012, there have been mixed but generally improving free cash flow metrics. The significant jump in free cash flow starting in 2015 has provided robust coverage. Notably, despite a substantial dividend payout in 2023, the free cash flow has grown to sufficiently cover this payout. This trend is positive as it indicates that as Paycom Software scaled, its ability to cover dividends with cash flow has substantially improved.

Stable Dividends Since the Company Began Paying Dividends?

Stable dividends over a period of 20 years indicate reliability and financial health of a company.

Paycom Software (PAYC) does not exhibit a stable dividend distribution history. In fact, the data showcases that the company has only initiated dividend payments in 2023, with a dividend per share of 1.125. This indicates that for any investor seeking stable and consistent dividend income, PAYC may not be an ideal candidate, especially considering the importance of historical performance for gauging future predictability. The fact that there is no record of a dividend that dropped by more than 20% might be because dividends were only introduced recently. Such a trend is not conducive for income-seeking investors who prioritize dividend stability.

Dividends Paid for Over 25 Years?

Consistent dividend payments over a long period like 25 years indicate stability and reliable return on investment.

The data indicates that Paycom Software (PAYC) has only started paying dividends recently in 2023 with a $1.125 dividend per share. Over the previous years from 2010 to 2022, no dividends were paid. This recent initiation into dividend distribution is a positive step, but it does not meet the criterion of having paid dividends for over 25 years. While this move may encourage dividends in the future, the lack of a long-term track record in consistent dividends is a point of consideration for investors seeking steady income from dividends. Thus, the trend does not align with the expectation of long-term dividend stability, indicating room for potential improvement in investor returns via dividends.

Reliable Stock Repurchases Over the Past 20 Years?

Reliable stock repurchases indicate a company's consistent effort to return value to shareholders by reducing the number of shares outstanding. This can lead to an increase in earnings per share and is generally seen as a positive signal by investors.

The data for Paycom Software (PAYC) shows that it has consistently repurchased shares in the years 2017, 2018, 2019, and 2023. The number of shares outstanding decreased during these years which points to a trend of repurchasing shares to return capital to shareholders. However, for most other years, the number of shares outstanding increased, indicating dilution. On average, over the last 20 years, the repurchase activity is minimal, making the trend unstable and less reliable overall.