Last update on 2024-06-27

Paychex (PAYX) - Dividend Analysis (Final Score: 6/8)

Discover Paychex (PAYX) dividend analysis scoring 6/8, showcasing performance, stability, and growth. Learn if PAYX's dividends match your investment goals!

Short Analysis - Dividend Score: 6

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

The dividend analysis of Paychex (PAYX) assessed its performance and stability using an 8-criteria scoring system, resulting in a score of 6. Here's a breakdown of how the company performed against each criterion: 1. Dividend Yield: Paychex's yield of 2.9049% is above the industry average of 2.6%, indicating good performance, but with historical volatility. 2. Dividend Growth: With an average growth rate of 36.19% over the last 20 years, Paychex shows strong and consistent growth. 3. Payout Ratio: Paychex has an average payout ratio of 89.31%, surpassing the benchmark of 65%, which might pose a risk to financial sustainability. 4. Earnings Coverage: Coverage varies significantly, indicating inconsistency, but periods of high multiples suggest potential for strong payout sustainability. 5. Cash Flow Coverage: Coverage ratios mainly below 1 show some volatility, implying that cash flow coverage could be improved. 6. Stability: Paychex failed to maintain stable dividends, with significant drops in specific years. 7. Longevity: Paychex has paid dividends for 25 years, showing commitment to shareholders. 8. Repurchases: Paychex has shown some reduction in share count, indicating a commitment to returning value to shareholders. Overall, Paychex demonstrates strengths in dividend growth and longevity, but areas of inconsistency and high payout ratios pose potential risks.

Insights for Value Investors Seeking Stable Income

Based on this analysis, Paychex (PAYX) shows some strong points such as a high dividend yield, significant dividend growth, and a long history of paying dividends. However, issues like high payout ratios, inconsistent earnings coverage, and volatility in dividend stability suggest caution. If you're an investor focusing on income and long-term dividend growth, Paychex's positive aspects might be attractive. But you should carefully consider the risks related to its sustainability and consistency before investing. Reviewing the company's recent financial statements and future growth plans would be wise to make an informed decision.

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 indicates how much a company pays out in dividends each year relative to its stock price.

Paychex's dividend yield of 2.9049%, which exceeds the industry average of 2.6%, showcases the company's strong dividend performance. Historically, the dividend yield has fluctuated significantly, peaking at 12.5402% in 2012 and reaching a low of 0.5711% in 2022. This higher yield is a positive indicator for income-focused investors, suggesting the company is committed to returning profits to shareholders. However, the volatility observed over the past two decades, dipping notably below the industry average at times, highlights the importance of considering other fundamentals.

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

The dividend growth rate measures the annualized percentage rate of growth of a company's dividend per share over a specified period, typically reflective of company health and profitability.

Over the past 20 years, Paychex (PAYX) has an average dividend per share ratio of 36.19%. This average significantly exceeds the threshold of 5%, suggesting strong and consistent growth. Despite some occasional dips and highly fluctuating annual growth rates, the long-term trend identifies a robust dividend growth. Over this extended period, shareholder returns via dividends have significantly outpaced the benchmark, signaling financial stability and positive future expectations. Therefore, this trend reflects well on the company's commitment to returning value to shareholders.

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

Analyzing payout ratios helps in determining if the company is maintaining a sustainable dividend policy.

The average payout ratio of Paychex (PAYX) over the last 20 years stands at approximately 89.31%, significantly surpassing the benchmark of 65%. This trend suggests that Paychex has frequently distributed more than 65% of its earnings as dividends, which might pose a risk to its long-term financial sustainability. Persistent high payout ratios can limit the company’s ability to reinvest in growth opportunities and cushion financial setbacks. Notably, the factors contributing to such heightened payout ratios should be more deeply explored, including any exceptional one-time costs, to understand their impact on overall financial health.

Dividends Well Covered by Earnings?

Dividends being well covered by earnings is important as it indicates the company's ability to sustain dividend payments without sacrificing growth or taking on debt.

Paychex's dividend coverage ratio, signifying how well earnings can cover dividend payouts, fluctuates significantly from year to year. The periodic drastic falls to zero, most notably in 2010, point toward inconsistency. On the brighter side, consistent years with high coverage exceeding 1.4 reflect strong payout sustainability without potentially hindering company growth or resorting to debt. Overall, though coverage fluctuates widely, periods of high multiples suggest dividends are, at times, well-backed by earnings, displaying financial health. However, the recurrent dips urge caution.

Dividends Well Covered by Cash Flow?

why it is important for dividends to be well covered by cash flow

The analysis reveals that Paychex has had a fluctuating yet generally strong free cash flow position over the past two decades. The company's free cash flow has exhibited notable growth from $313 million in 2003 to approximately $1.56 billion in 2023. Simultaneously, dividend payout amounts have also increased, from $165 million in 2003 to $1.175 billion in 2023. The key metric to focus on is the coverage ratio, defined as the portion of dividends covered by cash flow. Ratios above 1 indicate that the company generates enough free cash flow to cover its dividend payments fully. For most of the years, the coverage ratio remained below 1, oscillating between around 0.5 to 0.83. This fluctuating coverage suggests some volatility in how well dividends are covered by cash flow, although the general trend is not alarming given the long-term growth in both cash flows and dividend disbursements. Furthermore, the recent coverage ratios from 2021 to 2023, slightly below 0.76, imply that the company needs to enhance its cash flow or reconsider its dividend policy to ensure long-term sustainability and investor confidence.

Stable Dividends Since the Company Began Paying Dividends?

Stability in dividend payments, where the dividend per share did not drop by more than 20% over the past two decades, is of utmost importance for income-seeking investors.

Based on the dividend per share values provided for the past 20 years, it becomes evident that Paychex has some issues with dividend stability. For example, from 2009 to 2010, the dividend dropped from 2.17 to 0.93, a significant decrease of more than 20%. Similarly, other volatile shifts, like the decrease from 5.4 in 2019 to 2.98 in 2020, further indicate instability. These declines are substantial and would not instill confidence in an income-seeking investor who relies on consistent dividend payouts for steady income. Therefore, the trend displays elements of volatility, and the results demonstrate that Paychex failed to maintain the stable dividend required by strict income-driven investment strategies. This is a crucial issue that the company needs to address to attract and retain such investors.

Dividends Paid for Over 25 Years?

Dividends paid for over 25 years indicates a company's long-term stability and commitment to returning value to shareholders.

Examining the data for Paychex (PAYX), it is evident that the company has consistently paid dividends from 1998 to 2023. This is a 25-year period during which dividends have not only been consistently paid but have also shown an overall growth trend. For example, dividends per share started at $0.12 in 1998 and increased to $3.46 in 2023. This persistent upward trajectory in dividend payments is a positive indicator of Paychex's financial health and stable earnings. Therefore, the trend of paying dividends for over 25 years is very good, showcasing Paychex's reliability and attractiveness as an investment for income-focused investors.

Reliable Stock Repurchases Over the Past 20 Years?

Reliable stock repurchases refer to the consistent reduction in the number of shares outstanding. This is important as it signals the company’s commitment to returning value to shareholders and can lead to share price appreciation.

Over the past 20 years, Paychex (PAYX) has shown some level of commitment to reducing its share count, though not uniformly. From 2008 to 2023, there have been several years where the number of shares was decreased, such as in 2008, 2009, and continuously from 2014 to 2023. For example, the number of shares dropped from 369,528,000 in 2008 to 360,400,000 in 2023. Although there have been fluctuations in certain years, the overall trend shows a minor average decrease of -0.1414%, which is slight but positive. This trend is good as it indicates the company's ongoing efforts to repurchase shares, although the impact might be marginal.